Question

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

The most recent financial statements for Hailey Co. are shown here: Income Statement Balance Sheet Sales \$ 51,600 Current assets \$ 27,600 Long-term debt \$ 60,200 Costs 24,000 Fixed assets 121,000 Equity 88,400 Taxable income \$ 27,600 Total \$ 148,600 Total \$ 148,600 Taxes (22%) 6,072 Net income \$ 21,528 Assets and costs are proportional to sales. The company maintains a constant 30 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.)

Solution: - Given in Question -

First we need to calculate Return on Equity (ROE) -

ROE =

ROE = \$21,528 / \$88,400 = 24.35%

Then,

Calculate Retention Ration (b) -

Retention Ratio = 1 - Dividend payout Ratio

Retention Ratio = 1 - 0.30 = 70%

Maximum Percentage sales increase is the sustainable growth Rate.

Sustainable Growth Rate =

Sustainable Growth Rate =

Sustainable Growth Rate = 20.55%

So,

Maximum Increase in Sales = \$51,600 * 20.55%

Maximum Increase in Sales that can be sustanied assuming no new equity is issued= \$10,603.80.

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