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?

**(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.)**

Answer #1

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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