Question

# The most recent financial statements for Throwing Copper Co. are shown here:   Income Statement Balance Sheet...

 The most recent financial statements for Throwing Copper Co. are shown here:
 Income Statement Balance Sheet Sales \$45,000 Current assets \$70,470 Long-term debt \$48,600 Costs 28,800 Fixed assets 38,880 Equity 60,750 Taxable income \$16,200 Total \$109,350 Total \$109,350 Taxes (34%) 5,508 Net income \$10,692
 Assets and costs are proportional to sales. The company maintains a constant 22 percent dividend payout ratio and a constant debt−equity ratio.
 Required:
 What is the maximum increase in sales that can be sustained assuming no new equity is issued? (Do not round your intermediate calculations.)

Multiple Choice

• \$1,812.58

• \$7,160.61

• \$7,260.61

• \$7,060.61

• \$3,715.36

In the given problem, the max sales will be arrived at the sustainable growth Rate i.e. Current Sales * Sustainable Growth Rate

Sustainable Growth Rate = ROE * Retention Ratio / 1 - ROE * Retention Ratio

Retention Ratio = (1-0.22) = 0.78

ROE = Net Income ./ Equity value

= 10692 / 60750

= 17.6%

Sustainable Growth Rate = 0.176 * 0.78 / 1 - 0.176 * 0.78

= 15.91%

Maximum increase in sales that can be sustained assuming no new equity is issued = Current Sales * Sustainable Growth Rate

= 45000 * 15.91%

= 7161.59

option 2 is correct.