The most recent financial statements for Throwing Copper Co. are shown here: Inc

Question

The most recent financial statements for Throwing Copper Co. are shown here: Income Statement Balance Sheet Sales $55,000 Current assets $86,130 Long-term debt $59,400 Costs 35,200 Fixed assets 47,520 Equity 74,250 Taxable income $19,800 Total $133,650 Total $133,650 Taxes (34%) 6,732 Net income $13,068 Assets and costs are proportional to sales. The company maintains a constant 26 percent dividend payout ratio and a constant debtequity ratio. Required: What is the maximum increase in sales that can be sustained assuming no new equity is issued? (Do not round your intermediate calculations.)

Explanation / Answer

The maximum increase in sales that can be sustained is given by the sustainable growth rate (SGR).

SGR = (ROE x b) / [ 1 - (ROE x b) ]

where, ROE = return on equity, b = retention ratio

ROE = Net Income / Equity = $13,068 / $74,250 = 0.176

b = retention ratio = 1 - dividend payout = 1 - 0.26 = 0.74

SGR = (0.176 x 0.74) / [ 1 - (0.176 x 0.74) ] = 0.13024 / 0.86976 = 0.14974245768

Maximum increase in sales sustainable = Sales x SGR = $55,000 x 0.14974245768 = $8,235.8351724 or $8,235.84

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