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).

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