Question

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

 The most recent financial statements for Wise Co. are shown here:
 Income Statement Balance Sheet Sales \$ 52,200 Current assets \$ 22,000 Long-term debt \$ 45,500 Costs 42,100 Fixed assets 91,000 Equity 67,500 Taxable income \$ 10,100 Total \$ 113,000 Total \$ 113,000 Taxes (34%) 3,434 Net income \$ 6,666
 Assets and costs are proportional to sales. The company maintains a constant 20 percent dividend payout ratio and a constant debt–equity ratio.
 What is the maximum increase in sales that can be sustained assuming no new equity is issued? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
 Maximum increase in sales \$

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)]

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

= [\$6,666 / \$67,500] x 100

= 9.88%

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

= [0.0988 x (1 – 0.20)] / [1 – {0.0988 x (1 - 0.20)}]

= [0.0988 x 0.80] / [1 – (0.0988 x 0.80)]

= [0.0790 / 0.9210]

= 0.0858 or

= 8.58%

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

= \$52,200 x 8.58%

= \$4,478.76

“Hence, The Maximum Dollar Increase would be \$4,478.76”