Goals for Sales and Income Growth

Sunrise Corp. is a major regional retailer. The chief executive officer (CEO) is concerned with the slow growth both of sales and of net income and the subsequent effect on the trading price of the common stock. Selected financial data for the past three years follow.

Sunrise Corp.
(in millions)
		2016		2015		2014
1. Sales		$200.0		$192.5		$187.0
2. Net income		6.0		5.8		5.6
3. Dividends declared and paid		2.5		2.5		2.5
December 31 balances:
4. Owners equity		70.0		66.5		63.2
5. Debt		30.0		29.8		30.3
Selected year-end financial ratios
Net income to sales		3.0%		3.0%		3.0%
Asset turnover		2 times		2 times		2 times
6. Return on owners equity*		8.6%		8.7%		8.9%
7. Debt to total assets		30.0%		30.9%		32.4%

*Based on year-end balances in owners equity.

The CEO believes that the price of the stock has been adversely affected by the downward trend of the return on equity, the relatively low dividend payout ratio, and the lack of dividend increases. To improve the price of the stock, she wants to improve the return on equity and dividends.

She believes that the company should be able to meet these objectives by (1) increasing sales and net income at an annual rate of 10% a year and (2) establishing a new dividend policy that calls for a dividend payout of 50% of earnings or $3,000,000, whichever is larger.

The 10% annual sales increase will be accomplished through a new promotional program. The president believes that the present net income to sales ratio of 3% will be unchanged by the cost of this new program and any interest paid on new debt. She expects that the company can accomplish this sales and income growth while maintaining the current relationship of total assets to sales. Any capital that is needed to maintain this relationship and that is not generated internally would be acquired through long-term debt financing. The CEO hopes that debt would not exceed 35% of total liabilities and owners' equity.

Required:

1. Using the CEO's program, prepare a schedule that shows the appropriate data for the years 2017, 2018, and 2019 for the items numbered 1 through 7 on the preceding schedule.

Enter dollar amounts in millions rounded to three decimal places when applicable, such as 250.354.

To enter ratios, round your answer to three decimal places before converting to a percentage and enter your percentage answer rounded to one decimal place. For example, .88391 would be rounded to .884 and entered as 88.4.

Enter all amounts as positive numbers.

Sunrise Corp.
Schedule of Financial Data
For the Years 2017, 2018 and 2019
	2019	2018	2017
1. Sales	$	$	$
2. Net income	$	$	$
3. Dividends declared and paid	$	$	$
4. Owners' equity, December 31	$	$	$
5. Debt, December 31	$	$	$
6. Return on owners' equity	%	%	%
7. Debt to total assets	%	%	%

2. Can the CEO meet all of her requirements if a 10% per-year growth in income and sales is achieved? Explain your answer.

3. The CEO can improve the return on equity by doing

all of these.

reduce costs to improve profit margins.

focus on more profitable product lines.

increase total asset turnover.

4. What reason(s) might prevent the CEO from raising the debt-equity ratio to a very high level?

Resulting higher cost of debt due to increased risk and a potential drop in stock price.

Potential increase in cost of goods sold.

All of these.

Reduction in total asset turnover ratio.