The most recent financial statements for Alexander Co. are shown here: Income St
ID: 2764062 • Letter: T
Question
The most recent financial statements for Alexander Co. are shown here: Income Statement Balance Sheet Sales $ 50,000 Current assets $ 24,000 Long-term debt $ 54,500 Costs 38,000 Fixed assets 91,000 Equity 60,500 Taxable income $ 12,000 Total $ 115,000 Total $ 115,000 Taxes (34%) 4,080 Net income $ 7,920 Assets and costs are proportional to sales. The company maintains a constant 40 percent dividend payout ratio and a constant debt–equity ratio. What is the maximum dollar increase in sales that can be sustained assuming no new equity is issued? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Maximum increase in sales $
Explanation / Answer
SGR = (Profit Margin*(1-Dividend PO ratio)*(1+Debt to Equity Ratio)) / (Asset turnover Ratio-(profit Margin*(1-Dividend PO Ratio)*(1+Debt to Equiy Ratio))) Details Amount/% Profit Margin=Net Income/Sales 15.84% Dividend PO Ratio 40.00% Debt to Equity Ratio=Long Term Debt/Equity 90.08% Asset Turnover Ratio=Sales/Fixed Assets 54.95% (0.1584*((1-.4)*(1+1.9008)))/.549451-((0.1584*(1-.4)*(1+.9008)) (0.1584*((1-.4)*(1+1.9008)))/.5494551-((0.1584*(1-.4)*(1+.9008)) Sustainable Growth Rate 14.81% Current Sales 50,000.00 Sales to sustain the growth rate 57,400.00 Maximum Increase in Sales 7,400.00