Question

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

Income Statement		Balance Sheet
Sales	$60,000	Current assets	$93,960	Long-term debt	$64,800
Costs	38,400	Fixed assets	51,840	Equity	81,000
Taxable income	$21,600	Total	$145,800	Total	$145,800
Taxes (35%)	7,560
Net income	$14,040

Assets and costs are proportional to sales. The company maintains a constant 34 percent dividend payout ratio and a constant debt−equity ratio.

Required:

What is the maximum increase in sales that can be sustained assuming no new equity is issued? (Do not round your intermediate calculations.)

Answer 1

Return on Equity = Net Income / Equity
Return on Equity = $14,040 / $81,000
Return on Equity = 0.17333 or 17.333%

Retention Ratio = 1 - Payout Ratio
Retention Ratio = 1 - 0.34
Retention Ratio = 0.66

Sustainable Growth Rate = [Return on Equity * Retention Ratio] / [1 - Return on Equity * Retention Ratio]
Sustainable Growth Rate = [0.17333 * 0.66] / [1 - 0.17333 * 0.66]
Sustainable Growth Rate = 0.1143978 / 0.8856022
Sustainable Growth Rate = 0.1292 or 12.92%

Maximum Increase in Sales = Sustainable Growth Rate * Current Sales
Maximum Increase in Sales = 0.1292 * $60,000
Maximum Increase in Sales = $7,752