Haystone, Inc. 2014 Income Statement Net Sales $8,500 Cost of Goods sold 7,210 D
ID: 2638488 • Letter: H
Question
Haystone, Inc. 2014 Income Statement
Net Sales
$8,500
Cost of Goods sold
7,210
Depreciation
400
Earnings before interest and taxes
890
Interest paid
40
Taxable Income
$850
Taxes
310
Net Income
540
Dividends
$324
Addition to retained earnings
$216
Haystone, Inc. 2014 Balance Sheet
2008
2008
Cash
$1,600
Accounts payable
$2,075
Accounts rec.
975
Long-term debt
425
Inventory
2,425
Common stock
3,000
Total
$5,000
Retained earnings
1,700
Net Fixed Assets
2,200
Total Assets
$7,200
Total liabilities & equity
$7,200
1. Haystone, Inc. does not want to incur any additional external financing. Assuming the dividend payout ratio is constant, What is their maximum rate of growth?
2. If Haystone, Inc. decides to maintain a constant debt-equity ratio, what rate of growth can they maintain?
3. Haystone, Inc. is currently operating at maximum capacity. All costs, asstes, and current liabilities vary directly with sales. The tax rate and the dividend payout ratio will remain constant. How much additional debt is required if no new equity is raised and sales are projected to increase by 12 percent?
Net Sales
$8,500
Cost of Goods sold
7,210
Depreciation
400
Earnings before interest and taxes
890
Interest paid
40
Taxable Income
$850
Taxes
310
Net Income
540
Dividends
$324
Addition to retained earnings
$216
Explanation / Answer
Answer:
In the books of Haystone Inc.
1). Maximum Rate of Growth = ROE x (1 - dividend-payout ratio),
Here Dividend payout ratio = Dividends / Net Income = 324/540 = $0.6
ROE = Net Income/ Shareholders Equity = 540/3000= 0.18.
Therefore, Maximum rate of Growth = 0.18 x (1-0.6)
Hence, Maximum rate of Growth = 0.072 i.e 7.2 %
2). If the company keeps a constant debt equity ratio the growth rate will also remain constant s calculated in part 1 i.e 7.2%
3). If sales increase by 12% ,i.e., g= 0.12, then
g = (ROE
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