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?

(Omit the "\$" sign and commas in your response. Enter your answer rounded to 2 decimal places. For example, \$1,200.456 should be entered as 1200.46.)

The Maximum increase in sales is calculated by multiplying the current sales with the sustainable growth rate

Calculation of sustainable growth rate

Sustainable Growth Rate = [ROE x (1-Dividend Pay-out ratio)] / 1- [ROE x (1-Dividend Pay-out Ratio)]

Net Income = (Sales – costs) x (1 – Tax Rate)

= (\$47,152 – 36,870) x (1 - 0.34)

= \$6786.12

Equity = Total Assets – Long term debt

= (\$21260 + 85,534) – 48,216

= \$58,578

Return on Equity [ROE]= [Net Income / Equity] x 100

= [\$6,786.12 / 58,578) x 100

= 11.58%

Sustainable Growth Rate = [ROE x (1-Dividend Pay-out ratio)] / 1- [ROE x (1-Dividend Pay-out Ratio)] x 100

= [0.1158 x (1 – 0.19)] / 1 - [0.1158 x (1 - 0.19)] x 100

= [0.0938 / 0.9062] x 100

= 10.35%

Therefore, the maximum increase in sales = Current Sales x Sustainable growth rate

= \$47,152 x 10.35%

= \$4,880.23

“Hence, The maximum increase in sales = \$4,880.23”

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