This problem introduces the concept of ?sustainable dividends?: The firm whose financials are illustrated below wishes to maintain cash balances of 80 over the next 5 years. It also desires to issue neither additional stock nor make any changes in its current level of debt. This means that 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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A SUSTAINABLE DIVIDENDS--Template 10% 15% 2 Sales growth 3 Current assets/Sales 4 Current liabilities/Sales 5 Net fixed assets/Sales 6 Costs of goods sold/Sales 7 Depreciation rate 8 Interest rate on debt 9 Interest paid on cash & marketable securities 10 Tax rate 8% 77% 50% 10% 10.00% 8.00% 40% 11 12 Year 13 Income statement 14 Sales 15 Costs of goods sold 16 Interest payments on debt 17 Interest earned on cash & marketable securities 18 Depreciation 19 Profit before tax 20 Taxes 21 Profit after tax 22 Dividends 23 Retained earnings 3 4 1,000 (500) (32) (100) 374 (150) 225 (90) 135 24 25 Balance sheet 26 Cash and marketable securities 27 Current assets 28 Fixed assets 80 80 80 80 80 80 150 1,070 (300) 770 1,000 At cost 29 Depreciation Net fixed assets 31 32 Total assets 33 34 Current liabilities 35 Debt 36 Stock 37 Accumulated retained earnings 38 Total liabilities and equity 80 320 450 320 320 320 320 320 450 150 450 450 450 450 1,000