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

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

Income Statement				Balance Sheet
Sales	$	39,000		Current assets	$	24,200		Long-term debt	$	53,000
Costs		29,500		Fixed assets		80,000		Equity		51,200
Taxable income	$	9,500		Total	$	104,200		Total	$	104,200
Taxes (34%)		3,230
Net income	$	6,270

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 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.)

Maximum increase in sales

$

 

Explanation:

The maximum percentage sales increase is the sustainable growth rate. To calculate the sustainable growth rate, we first need to calculate the ROE, which is:

ROE	=	NI / TE
ROE	=	$6,270 / $51,200
ROE	=	.1225, or 12.25%

The plowback ratio, b, is one minus the payout ratio, so:

b	=	1 – .30
b	=	.70

Now we can use the sustainable growth rate equation to get:

Sustainable growth rate	=	(ROE × b) / [1 – (ROE × b)]
Sustainable growth rate	=	[.1225(.70)] / [1 – .1225(.70)]
Sustainable growth rate	=	.0938, or 9.38%

  

So, the maximum dollar increase in sales is:

Maximum increase in sales	=	$39,000(.0938)
Maximum increase in sales	=	$3,656.64