This problem introduces the concept of “sustainable dividends”: The firm whose financials are illustrated in the following spreadsheet wishes to maintain cash balances of 80 over the next five years. It also desires neither to issue additional stock nor to make any changes in its current level of debt. As a result, dividends are the plug in the balance sheet. Model this situation (note that for some parameter levels you may get “negative dividends,” indicating that there is no sustainable level of dividends).

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1 2 Sales growth 3 Current assets/Sales 4 Current liabilities/Sales 5 Net fixed assets/Sales 6 Costs of goods sold/Sales Depreciation rate 7 8 Interest rate on debt A B C D E F G SUSTAINABLE DIVIDENDS--Template 9 Interest paid on cash & marketable securities 10 Tax rate 11 12 Year 13 Income statement 14 Sales 15 Costs of goods sold 16 Interest payments on debt 17 Interest eamed on cash & marketable securities 18 Depreciation 10% 15% 8% 77% 50% 10% 10.00% 8.00% 40% 0 1 2 3 4 5 1,000 (500) (32) 6 (100) 374 19 Profit before tax 20 Taxes (150) 21 Profit after tax 22 Dividends 23 Retained earnings 225 (90) 135 24 25 Balance sheet 26 Cash and marketable securities 80 80 80 80 80 80 27 Current assets 150 28 Fixed assets 29 At cost 1,070 30 Depreciation (300) 31 Net fixed assets 770 32 Total assets 33 1,000 35 36 Stock 34 Current liabilities Debt 80 320 320 320 320 320 320 450 450 450 450 450 450 37 Accumulated retained earnings 150 38 Total liabilities and equity 1,000