Question

In: Accounting

1. TYU Inc. has a profit margin of 8.3 percent and a payout ratio of 42...

1. TYU Inc. has a profit margin of 8.3 percent and a payout ratio of 42 percent. The firm has annual sales of $386,400, current liabilities of $37,200, long-term debt of $123,800, and net working capital of $16,700, and net fixed assets of $391,500. No external equity financing is possible. What is the internal growth rate?

2. Jump Company., has annual sales of $40,934, depreciation of $3,100, interest paid of $750, cost of goods sold of $22,400, taxes of $3,084, and dividends paid of $4,060. The firm has total assets of $55,300 and total debt of $32,600. The firm wants to maintain a constant payout ratio but does not want to incur any additional external financing. What is the firm's maximum rate of growth?

Expert Solution

Answer:

1)

Calculation of Internal growth rate

Internal growth rate = ROA x b/1-(ROA x b)

ROA = return on assets and b= retention ration.

Thus b = 1- dividend payout ration

Therefore net income = 83% of 386400 =

= 83/100 x 386400

= $ 32071.2

And net working capital - current assets - current liabilities

Therefore current assests - 37200 = 16700

= 16700 + 37200

= $ 53900

Here total assets = current assets + net fixed assets = 53900 +391500

= 445400

There fore ROA =53900 / 445400

= 0.072005

b = 1-48% = 0.52

Therefore internal growth rate = 00072005 x 0.52/1- (0.072005 x 0.52)

= 0.041763 / 0.0958237

= 4.36%

The thernal growth rate is 4.36% .

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2)

Annual sales is $ 40934

Cost of goods sold is $ 22,400

Depreciation is $ 3100

Interest paid $ 750

Taxes $ 3084

Calculation of Net Income

Net Income = (40934-22400-3100-750-3084) = 11600

Calculation of retention ratio b=(11600-4060)/11600 0.65

Calculation of ROA = 11600/55300 = 20.98%

Calculation of Firms maximum rate of growth

= ( ROA x b)(1-(ROA x b)

= (20.98% x 0.65)(1-(2098% x 0.65)

= 15.79 %

The Firms maximum rate of growth rate is 15.79%.

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ekkarill92 answered 3 hours ago

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