The most recent financial statements for Heng Co. are shown here: Assets and costs are proportional to sales. The company maintains a constant 40 percent dividend payout ratio and a constant debt-equity ratio. What is the maximum increase in sales that can be sustained next year assuming no new equity is issued?

Question

The most recent financial statements for Heng Co. are shown here:  Assets and costs are proportional to sales. The company maintains a constant 40 percent dividend payout ratio and a constant debt-equity ratio. What is the maximum increase in sales that can be sustained next year assuming no new equity is issued?

Quizplus · Accepted Answer

Return on equity = $13,068/$74,250 = 0.176Retention ratio = 1 - .40 = .60Sustainable growth rate = (0.176 F1F1F1S1F1F1F10 .60)/[1 - (0.176 F1F1F1S1F1F1F10 .60)] = .118068Maximum increase in sales = $55,000 F1F1F1S1F1F1F10 .118068 = $6,493.74

The Most Recent Financial Statements for Heng Co