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

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

Income Statement				Balance Sheet
Sales	$	38,000		Current assets	$	21,200		Long-term debt	$	45,000
Costs		29,000		Fixed assets		75,000		Equity		51,200
Taxable income	$	9,000		Total	$	96,200		Total	$	96,200
Taxes (34%)		3,060
Net income	$	5,940

Assets and costs are proportional to sales. The company maintains a constant 20 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 final 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	=	$5,940 / $51,200
ROE	=	0.1160, or 11.60%

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

b	=	1 – 0.20
b	=	0.80

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

Sustainable growth rate	=	(ROE × b) / [1 – (ROE × b)]
Sustainable growth rate	=	[0.1160(0.80)] / [1 – 0.1160(0.80)]
Sustainable growth rate	=	0.1023, or 10.23%

  

So, the maximum dollar increase in sales is:

Maximum increase in sales	=	$38,000(0.1023)
Maximum increase in sales	=	$3,887.70