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Chapter 4 HW Part 2

# Chapter 4 HW Part 2 - The most recent financial statements...

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The most recent financial statements for Throwing Copper Co. are shown here (Do not include the dollar sign (\$). Round your answer to 2 decimal places. (e.g., 32.16)) :

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Income Statement Balance Sheet Sales \$55,000 Current assets \$26,730 Long-term debt \$59,400 Costs 35,200 Fixed assets 106,920 Equity 74,250 Taxable income \$19,800 Total \$133,650 Total \$133,650 Taxes (34%) 6,732 Net income \$13,068 Assets and costs are proportional to sales. The company maintains a constant 26 percent dividend payout ratio and a constant debt-equity ratio. The maximum increase in sales that can be sustained assuming no new equity is issued is \$. 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 = \$13,068 / \$74,250 ROE = .1760 or 17.60% The plowback ratio, b, is one minus the payout ratio, so: b = 1 − .26 b = .74 Now we can use the sustainable growth rate equation to get: Sustainable growth rate = (ROE × b) / [1 − (ROE × b)] Sustainable growth rate = [.1760(.74)] / [1 − .1760(.74)] Sustainable growth rate = .1497 or 14.97% So, the maximum dollar increase in sales is: Maximum increase in sales = \$55,000(.1497) Maximum increase in sales = \$8,235.84 The income statement of Heir Jordan Corporation follows: HEIR JORDAN CORPORATION Income Statement Sales \$29,000 Costs 14,500 Taxable Income \$14,500 Taxes (34%)

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Chapter 4 HW Part 2 - The most recent financial statements...

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