Question

Percentage of Sales Models. Here are abbreviated financial statements for Planners Peanuts:

Income statement 2019
Sales	$2000
cost	$1500
Net Income	$500

Balance Sheet, year-end
	2018	2019		2018	2019
Assets	$2500	$3000	Debt	$833	$1000
			Equity	$1667	$2000
Total	$2500		Total	$2500	$3000

1. If sales increase by 20% in 2020 and the company uses a strict percentage of sales planning model (meaning that all items on the income and balance sheet also increase by 20%, what must be the balancing item?

2. What will be the value of this balancing item?

3. What is the maximum possible growth rate for Planners Peanuts if the payout ratio remains at 50%? 3a. What if no Debt or equity is to be issued?

   ​​​​​​​3b. What if the firm maintains a fixed debt ratio, but issues no equity?

Answer 1

Answer-1:

The balancing item will be equity , its value = $2,000 + (20% of $2,000) = $2,000 + $400 = $2,400

Answer-3a:

Maximum possible growth rate if no Debt or equity is to be issued:

= retained earnings / assets

= ($500 - 50% of $500) / $3,000 = 83.33%

Answer-3b:

Maximum possible growth rate if the firm maintains a fixed debt ratio, but issues no equity:

= (retained earnings(1 +D/E)) / (debt + equity) = 6.37%