Income Statement Balance Sheet Long-term debt 35,750 Fixed assets 68,550 Equity Current Sales $43,550 $ 17,900 $ 37,270 assets Costs 49,180 Тахаble $ 7,800 Total $86,450 Total $86,450 income Taxes (25%) 1,950 Net income $ 5,850 Assets and costs are proportional to sales. The company maintains a constant 55 percent dividend payout ratio and a constant debt-equity ratio. What is the maximum dollar increase in sales that can be sustained assuming no new equity is issued?
Income Statement Balance Sheet Long-term debt 35,750 Fixed assets 68,550 Equity Current Sales $43,550 $ 17,900 $ 37,270 assets Costs 49,180 Тахаble $ 7,800 Total $86,450 Total $86,450 income Taxes (25%) 1,950 Net income $ 5,850 Assets and costs are proportional to sales. The company maintains a constant 55 percent dividend payout ratio and a constant debt-equity ratio. What is the maximum dollar increase in sales that can be sustained assuming no new equity is issued?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:**Income Statement and Balance Sheet Analysis**
**Income Statement:**
- **Sales:** $43,550
- **Costs:** $35,750
- **Taxable Income:** $7,800
- **Taxes (25%):** $1,950
- **Net Income:** $5,850
**Balance Sheet:**
- **Current Assets:** $17,900
- **Fixed Assets:** $68,550
- **Total Assets:** $86,450
- **Long-term Debt:** $37,270
- **Equity:** $49,180
- **Total Liabilities and Equity:** $86,450
**Analysis & Inquiry:**
- **Proportionality:** Assets and costs are proportional to sales.
- **Dividend Payout Ratio:** The company maintains a constant 55 percent dividend payout ratio.
- **Debt-Equity Ratio:** The company keeps a constant debt-equity ratio.
**Question:**
What is the maximum dollar increase in sales that can be sustained assuming no new equity is issued?
**Explanation:**
To analyze the financial health and potential for growth in sales while maintaining the current financial structure, the following factors need to be considered:
1. **Proportional Asset and Cost Increase:** Since both assets and costs grow proportionally with sales, any increase in sales will necessitate a proportional increase in assets and costs.
2. **Dividend Payout:** With a consistent 55% dividend payout ratio, the company reinvests the remaining 45% of its net income into the business.
3. **Debt-Equity Ratio:** By maintaining a constant debt-equity ratio, the company's new debt and equity will grow at the same rate as its assets and sales.
**Graph/Diagram Explanation:**
- The financial tables present the company's income statement and balance sheet data in a structured format.
- **Income Statement Table:** Lays out the sales, costs, taxable income, taxes, and net income step-by-step, showing the financial performance over a period.
- **Balance Sheet Table:** Shows the detailed breakdown of the company's current and fixed assets, as well as the corresponding long-term debt and equity, maintaining balance in the financial status.
This detailed analysis helps in determining the company's capacity for sustainable growth in sales without issuing new equity, leveraging existing assets, and maintaining financial stability through proportional growth and controlled payout ratios.
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