Sunset Corp. is a major regional retailer. The chief executive officer (CEO) is concerned with the slow

Question:

Sunset 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.

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, he wants to improve the return on equity and dividends. He 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 60% of earnings or $2,000,000, whichever is larger.
The 10% annual sales increase will be accomplished through a product enhancement 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. He 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 25% of total liabilities and stockholders' equity.
Required
1. Using the CEO's program, prepare a schedule that shows the appropriate data for the years 2018, 2019, and 2020 for the items numbered 1 through 7 on the preceding schedule.
2. Can the CEO meet all of his requirements if a 10% per-year growth in income and sales is achieved? Explain your answers.
3. What alternative actions should the CEO consider to improve the return on equity and to support increased dividend payments?