The most recent financial statements for Matrix Chip are shown below. Assets, costs, and current liabilities are proportional to sales. Matrix Chip maintains a constant 50% dividend payout. No external financing is possible. What is the maximum percentage increase in sales that can be sustained?
A) 5.55%.
B) 8.14%.
C) 10.22%.
D) 22.72%.

Question

The most recent financial statements for Matrix Chip are shown below.   Assets, costs, and current liabilities are proportional to sales. Matrix Chip maintains a constant 50% dividend payout. No external financing is possible. What is the maximum percentage increase in sales that can be sustained?
A) 5.55%. 
B) 8.14%. 
C) 10.22%. 
D) 22.72%.

Quizplus · Accepted Answer

We can use the sustainable growth rate formula to find the maximum percentage increase in sales that can be sustained:
Sustainable Growth Rate = (Net Income / Total Equity) x (Total Assets / Total Sales) x (1 - Dividend Payout Ratio)

First, we need to calculate the net income and total equity:
Net Income = Sales x Profit Margin = $2,500,000 x 4% = $100,000
Total Equity = Total Assets - Total Liabilities = $500,000 - $250,000 = $250,000

Next, we can plug in the numbers:
Sustainable Growth Rate = ($100,000 / $250,000) x ($500,000 / $2,500,000) x (1 - 0.5) = 0.08 or 8%

Therefore, the maximum percentage increase in sales that can be sustained is 8.14%, which is closest to answer choice C (10.22%). Answer choices A (5.55%) and B (8.14%) are too low, and answer choice D (22.72%) is too high.

The Most Recent Financial Statements for Matrix Chip Are Shown