The most recent financial statements for Silly Co. are shown here: Assets and co

Question

The most recent financial statements for Silly Co. are shown here:

Assets and costs are proportional to sales. The company maintains a constant 25 percent dividend payout ratio and a constant debt-equity ratio.

What is the maximum increase in sales that can be sustained assuming no new equity is issued?

I keep coming up with $4397.99 as my answer. Here is my work: RoE= 7722/70700= .10922 or 10.922%

b= 1-.25 = .75 SGR= (RoE x b)/(1-RoE x b) SGR= 8.9028

Max Increase in sales= 49400 x .089208 = 4397. 9832

Can anyone helpout?

The most recent financial statements for Silly Co. are shown here:

INCOME STATEMENT BALANCE SHEET   Sales $ 49,400 Current assets $ 22,200 Long-term debt $ 39,500   Costs 37,700 Fixed assets 88,000 Equity 70,700   Taxable income $ 11,700 Total $ 110,200   Total $ 110,200   Taxes (34%) 3,978           Net income $ 7,722

Explanation / Answer

Sustainable Growth RAte = ROEx(1- Dividend PAyout RAtio)

ROE = Average NEt Income/Average Stockholder's Equity

ROE = 7722/70700 = 10.92%

SGR = ROEx(1- Dividend PAyout RAtio) = 10.92 x(1 - 0.25)

SGR = 8.19%

MAximum Increase in Sales = 49400 x 8.19% =$4045.86

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