Question

The most recent financial statements for Mc Govney Co. are shown here: Income Statement Sales $47152 Costs $36870 Taxable Income ? Taxes (34%) ? Net Income ? Balance Sheet Current Asset $21260 Long-term Debt $48216 Fixed Asset $85534 Equity ? 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?

Answer 1

Income Statement

Sales $47152

Costs ($36870)

Taxable income $10282

Taxes (34%) ($3495.88)

Net income $6786.12.

Statement of Balance Sheet

Assets	Amount($)	Liabilities	Amount($)
Current assets	$21260	Long term debt	$48216
Fixed assets	$85534	Equity	$58578
Total assets	$106794	Total liabilities	$106794

Calculate maximum increase in sales that can be sustained assuming no new equity is issued

Return on equity = Net income / Total equity

= $6786.12 / $58578

= 0.1158 or 11.58%.

Plow back ratio b = 1 - dividend payout ratio

= 1 - 0.19

= 0.81

Sustainable growth rate = (ROE * b) / [ 1 - (ROE * b)]

= (0.1158 * 0.81) / [ 1 - (0.1158 * 0.81)]

= 0.0938 / 0.9062

= 0.1035 or 10.35%.

Increase in sales = $47152 * 0.1035

= $4880.23.

=