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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