Question

The most recent financial statements for Mc Govney Co. are shown here:

Income Statement
Sales	$52,213
Costs	$38,913
Taxable Income	?
Taxes (34%)	?
Net Income	?

Balance Sheet
Current Asset	$23,106	Long-term Debt	$47,810
Fixed Asset	$85,206	Equity	?

Assets and costs are proportional to sales. The company maintains a constant 17 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?

Answer 1

Income Statement
Sales	$52,213
Costs	$38,913
Taxable Income	$13,300
Taxes (34%)	$4,522
Net Income	$8,778
Balance Sheet
Current Asset	$23,106	Long-term Debt	$47,810
Fixed Asset	$85,206	Equity	$60,502
Total	$108,312	Total	$108,312

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

Sustainable growth rate= [ROE* Retention ratio]/1- [ROE* Retention Ratio]

ROE= Net income/ Total equity * 100

ROE= $8778/60502 *100= 14.51%

Retention ratio- 1- Dividend payout ratio

Retention ratio- 1- 17%= 83%

Sustainable growth rate= [14.51% * 83%]/ 1- [14.51% * 83%]

Sustainable growth rate= .120421/ 1-.120421

Sustainable growth rate= .1369 or 13.69%

Maximum increase in sales that can be sustained assuming no new equity is issued= $52213* 13.69%= $7148.39