Question

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? |

Maximum increase in sales | $ |

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)]

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”**

The most recent financial statements for Weyland 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...

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INCOME STATEMENT
BALANCE SHEET
Sales
$
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Current assets
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Long-term debt
$
46,500
Costs
29,400
Fixed assets
79,000
Equity
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Taxable income
$
9,400
Total
$
102,600
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Income Statement
Balance Sheet
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Balance Sheet
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