The most recent financial statements for Alexander Co. are shown here: Assets an
ID: 2338445 • Letter: T
Question
The most recent financial statements for Alexander Co. are shown here:
Assets and costs are proportional to sales. The company maintains a constant 45 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.)
Income Statement Balance Sheet Sales $ 44,900 Current assets $ 18,620 Long-term debt $ 37,720 Costs 36,200 Fixed assets 69,000 Equity 49,900 Taxable income $ 8,700 Total $ 87,620 Total $ 87,620 Taxes (24%) 2,088 Net income $ 6,612Explanation / 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)]
Return on Equity [ROE]= [Net Income / Equity] x 100
= [$6612 / 49900) x 100
= 13.25%
Sustainable Growth Rate = [ROE x (1-Dividend Pay-out ratio)] / 1- [ROE x (1-Dividend Pay-out Ratio)] x 100
= [0.1325 x (1 – 0.45)] / 1 - [0.1325 x (1 - 0.45)] x 100
= [0.0729 - 0.9271] x 100
= 7.86%
The maximum increase in sales = Current Sales x Sustainable growth rate
= $44,900 x 7.86%
= $3,529.14
“Therefore, The maximum increase in sales = $3,529.14”
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