The most recent financial statements for Wise Co. are shown here: |
Income Statement | Balance Sheet | ||||||||||
Sales | $ | 53,200 | Current assets | $ | 25,000 | Long-term debt | $ | 53,500 | |||
Costs | 42,600 | Fixed assets | 96,000 | Equity | 67,500 | ||||||
Taxable income | $ | 10,600 | Total | $ | 121,000 | Total | $ | 121,000 | |||
Taxes (34%) | 3,604 | ||||||||||
Net income | $ | 6,996 | |||||||||
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 (sustainable growth rate)? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
Maximum increase in sales | $ |
ROE = Net Income / Total Equity = $6,996 / $67,500 = 0.1036, or 10.36%
Plowback Ratio = 1 - payout ratio
= 1 - 0.30 = 0.70
Sustainable Growth Rate = [ROE * b] / [1 - (ROE * b)]
= [0.1036 * 0.70] / [1 - (0.1036% * 0.70)]
= 0.0726 / 0.9274 = 0.0782, or 7.82%
Maximum Increase in Sales = Current Sales * g
= $53,200 * 0.0782 = $4,161.65
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