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 Sales Costs Balance Sheet 7,580 debt Long-term $37,070 $42,950 Current assets 5,550 Fixed assets 68,350 Equity 48,860 axable$7,400 Total $85,930 Total $85,930 income Taxes (21%) 1,554 Net income $ 5,846 Assets and costs are proportional to sales. The company maintains a constant 35 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 decimal places, e.g., 32.16.) Maximum dollar increase

Explanation / Answer

ROE = NI / TE

ROE = $5,846/ $48,860

ROE = 0.1196, or 11.96%

The plowback ratio, b, is one minus the payout ratio, so:

b= 1 – 0.35

b= 0.65

Now we can use the sustainable growth rate equation to get:

Sustainable growth rate = (ROE × b) / [1 – (ROE × b)]

Sustainable growth rate = [0.1196(0.65)] / [1 – 0.1196(0.65)]

Sustainable growth rate = 0.0778 / 0.9222 = 0.0843, or 8.43%

So, the maximum dollar increase in sales is:

Maximum increase in sales = $42,950(0.0843)

Maximum increase in sales = $3,621.96

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