The most recent financial statements for Alexander Co. are shown here: Income Statement Balance Sheet Sales $45,000 Current assets $70,470 Long-term debt $48,600 Costs 28,800 Fixed assets 38,880 Equity 60,750 Taxable income $16,200 Total $109,350 Total $109,350 Taxes (23%) 3,726 Net income $12,474 Assets and costs are proportional to sales. The company maintains a constant 28 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

$7,808

Explanation:

Calculation for the maximum increase in sales that can be sustained assuming no new equity is issued

First step is to calculate for the return on equity using this formula

Return On Equity = Net income / Equity

Let plug in the formula

Return On Equity=$12,474 / $60,750

Return On Equity= 20.53%

Second step is to find the retention ratio using this formula

Retention ratio= 1 - Dividend payout ratio

Let plug in the formula

Retention ratio= 1 - 0.28

Retention ratio= 0.72

Third step is to find the sustainable growth rate using this formula

Sustainable growth rate= (ROE × b) / [1 - (ROE × b)]

Let plug in the formula

Sustainable growth rate= ( 0.2053x 0.72 ) / [ 1 - ( 0.2053x 0.72 ) ]

Sustainable growth rate=0.147816/1-0.147816

Sustainable growth rate= 0.147816/0.852184

Sustainable growth rate=17.35%

Therefore the maximum dollar increase in sales is

Maximum dollar increase= $ 45,000 x 0.1735

Maximum dollar increase= $7,808 Approximately

Therefore the maximum dollar increase in sales will be $7,808

Note:28%-100% will give us 72%

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