Question

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

Answer 1

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.