Question

# The most recent financial statements for Mc Govney Co. are shown here: Income Statement Sales \$47152...

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?

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.

=