The most recent financial statements for alexander co. are shown here: income statement balance sheet sales $ 43,100 current assets $ 17,660 long-term debt $ 37,120 costs 35,600 fixed assets 68,400 equity 48,940 taxable income $ 7,500 total $ 86,060 total $ 86,060 taxes (22%) 1,650 net income $ 5,850 assets and costs are proportional to sales. the company maintains a constant 40 percent dividend payout ratio and a constant debt-equity ratio. what is the maximum dollar 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.)

$3,328.61

Explanation:

In this question to find out the maximum dollar increase in sales without issuing new equity , we need to take help of sustainable growth rate, whose formula =

(Return on equity x Retention ratio) / [1 - (Return on equity x Retention ratio)]

Here we need to take out the sustainable growth rate and multiply it by total sales .

So lets take out the sustainable growth rate by first calculating its components -

Return on equity  = Net income / Total equity

                             = $5,850 / 48,940

                             = .1195

Retention ratio = 1 - Dividend payout ratio

                         = 1 - 40%

                         = 1 - .4

                         = .6

Now calculating substantial growth rate =

(Return on equity x Retention ratio) / [1 - (Return on equity x Retention ratio)]

= (.1195 x .6) / [1 - (.1195 x .6)]

= .0717 / [1 - .0717]

= .0717 / .9283

= .07723 ( multiplying by 100 to make in percentage)

= 7.723%

Now multiplying this by total sales,

MAXIMUM INCREASE IN SALES = $43,100 X 7.723%

                                                      = $ 3,328.61

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