The most recent financial statements for Alexander Co. are shown here: Income St

Question

The most recent financial statements for Alexander Co. are shown here: Income Statement Balance Sheet Sales $ 49,200 Current assets $ 21,600 Long-term debt $ 53,000 Costs 37,600 Fixed assets 87,000 Equity 55,600 Taxable income $ 11,600 Total $ 108,600 Total $ 108,600 Taxes (34%) 3,944 Net income $ 7,656 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?

Explanation / Answer

Current Year Data (given):

Sales = $49200 ; Costs = $ 37600 ; PBT = $ 11600 ; Taxes (34%) = 3944 ; Net Income = 7656 ; Dividend Pay out (40%) = 7656 * 40% = 3062.4 ; Retained Earnings = (7656-3062.4) = 4593.6

Current Assets = $21600 ; FA = $87000 ; TA = $108600

Debt = $53000 ; Equity = $55600 ; TL & Eq = $108600

ROE = Net Income / Equity = 7656/55600 = 13.77%

The plough back ratio (k) = 1-0.40 = 0.60

Sustainable growth rate in sales without new equity = [ROE * k] / [1 - (ROE*k)] = [13.77% * 0.60] / [ 1- (13.77% * 0.60] = 9.01%

Hence maximum dollar increase in sales = (49200 * 9.01%) = $4430.92

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