Question

The most recent financial statements for Hailey Co. are shown here:

Income Statement				Balance Sheet
Sales	$	57,000		Current assets	$	28,500		Long-term debt	$	62,000
Costs		24,600		Fixed assets		122,500		Equity		89,000
Taxable income	$	32,400		Total	$	151,000		Total	$	151,000
Taxes (25%)		8,100
Net income	$	24,300

Assets and costs are proportional to sales. The company maintains a constant 25 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? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

To find the maximum increase in sales that can be sustained assuming no new equity is issued, we first need to calculate the sustainable growth rate which is the growth rate that the company can achieve without obtaining any external equity

To find the sustainable growth rate , we need dividend payout ratio and Return on Equity

the formulas to calculate the above parameters are shown in the excel image

maximum increase in sales = sustainable growth rate* recent sales