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The most recent financial statement for Momentum Industries are shown below: Income Statement Balance Sheet Sales $42,800 Current Assets $19,800 Long-term debt $39,000 Costs $35,500 Fixed assets $68,200 Equity $49,000 Taxable Income $7,300 Total $88,000 Total $88,000 Taxes (21%) $1,533 Net Income $5,767 Assets and costs are proportional to sales. The company maintains a constant 45 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?

Respuesta :

jepessoa

Answer:

$2,962.19

Explanation:

We first need to calculate the return on equity (ROE) = net income / shareholders' equity = $5,767 / $49,000 = 11.7694%

now we calculate the plowback ratio = 1 - payback ratio

plowback ratio = 1 - 45% = 55%

then we need to determine the sustainable growth rate = (ROE x plowback) / [1 - (ROE x plowback)] = (11.7694% x 0.55) / [1 - (11.7694% x 0.55)] = 0.06473 / 0.93527 = 6.921%

maximum increase in sales = total sales x sustainable growth rate = $42,800 x 6.921% = $2,962.19

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