The most recent financial statements for Mc Govney Co. are shown here: Assets an
ID: 2821645 • Letter: T
Question
The most recent financial statements for Mc Govney Co. are shown here:
Assets and costs are proportional to sales. The company maintains a constant 19 percent dividend payout ratio and a constant debt–equity ratio.
What is the maximum increase in sales (in $) that can be sustained assuming no new equity is issued?
(Omit the "$" sign and commas in your response. Enter your answer rounded to 2 decimal places. For example, $1,200.456 should be entered as 1200.46.)
Income Statement Sales $47152 Costs $36870 Taxable Income ? Taxes (34%) ? Net Income ?Explanation / Answer
The Maximum increase in sales is calculated by multiplying the current sales with the sustainable growth rate
Calculation of sustainable growth rate
Sustainable Growth Rate = [ROE x (1-Dividend Pay-out ratio)] / 1- [ROE x (1-Dividend Pay-out Ratio)]
Net Income = (Sales – costs) x (1 – Tax Rate)
= ($47,152 – 36,870) x (1 - 0.34)
= $6786.12
Equity = Total Assets – Long term debt
= ($21260 + 85,534) – 48,216
= $58,578
Return on Equity [ROE]= [Net Income / Equity] x 100
= [$6,786.12 / 58,578) x 100
= 11.58%
Sustainable Growth Rate = [ROE x (1-Dividend Pay-out ratio)] / 1- [ROE x (1-Dividend Pay-out Ratio)] x 100
= [0.1158 x (1 – 0.19)] / 1 - [0.1158 x (1 - 0.19)] x 100
= [0.0938 / 0.9062] x 100
= 10.35%
Therefore, the maximum increase in sales = Current Sales x Sustainable growth rate
= $47,152 x 10.35%
= $4,880.23
“Hence, The maximum increase in sales = $4,880.23”