Question

In: Finance

The GAMA Company has the following results. Net sales = $6,000,000 Net total assets = $4,000,000...

The GAMA Company has the following results.

Net sales = $6,000,000

Net total assets = $4,000,000

Depreciation = $160,000

Net income = $400,000

Long-term debt = $2,000,000

Equity = $1,160,000

Dividends = 160,000

a. Compute GAMA’s ROE directly. Confirm this using the three components (DuPont Equation).

b. Using the ROE computed in Part a, what is the expected sustainable growth rate forGAMA?

c. Assuming the firm’s net profit margin (Net Income / Sales) went to 0.04, what would happen to GAMA’s Net Income and ROE?

d. Using the ROE in Part c, what is the expected sustainable growth rate? What if dividends were only $40,000?

Expert Solution

a. Compute GAMA’s ROE directly. Confirm this using the three components (DuPont Equation).

Calculating the ROE using the three components

Return on Earnings = Net Income / Equity = (Net Income /Sales) * (Net Sales/common equity) = (400,000/6,000,000) * (6,000,000/1,160,000) = 0.345

Therefore ROE = 34.50%

b. Using the ROE computed in Part a, what is the expected sustainable growth rate forGAMA?

Sustainable Growth Rate = Retention rate * ROE

Retention Rate = 1-(Dividends Declared/Net Earnings) = 1-(160000/400000) = 0.60

ROE = 0.345

Sustainable Growth Rate = 0.60 * 0.345 = 0.207 or 20.7%

c. Assuming the firm’s net profit margin (Net Income / Sales) went to 0.04, what would happen to GAMA’s Net Income and ROE?

Net Profit Margin = Net Income/Net Sales

0.04 = Net Income/6,000,000 = Net Income = 6,000,000*0.04

Net Income = $240,000

ROE = Net Income/Equity = 240000/1160,000 = 0.20689 or 20.69%

d. Using the ROE in Part c, what is the expected sustainable growth rate? What if dividends were only $40,000?

Sustainable Growth Rate = Retention rate * ROE

Retention rate = 0.60

New ROE = 20.68%

Sustainable Growth Rate = 0.60 * 0.2068 = 0.12408 = 12.41%

If the dividends were $40,000

Sustainable Growth Rate = Retention Rate * ROE

New Retention Rate = 1-(Dividends declared/Net Earnings) = 1-(40000/400,000) = 1-0.10 = 0.90

Sustainable Growth rate = 0.90 * 0.345 = 0.3105

or Sustainable Growth Rate = 31.05%

jeff jeffy answered 2 years ago

A firm’s Total Assets is $4,000,000 and its Total Asset Turnover is 0.25. This firm’s Sales...

A firm’s Total Assets is $4,000,000 and its Total Asset Turnover is 0.25. This firm’s Sales equals: a. $250,000 b. $1,000,000 c. $16,000,000 d. $40,000,000

The Rangoon Timber Company has the following ratios: Net sales/Total assets = 2.26; ROA 8.95%; ROE...

The Rangoon Timber Company has the following ratios: Net sales/Total assets = 2.26; ROA 8.95%; ROE 17.09%. What are Rangoon’s profit margin and debt ratio? (Round answer to 2 decimal places, e.g. 12.55 or 12.55%.) Rangoon’s profit margin is % and its debt ratio is .

A company has $20 billion of sales and $1 billion of net income. Its total assets...

A company has $20 billion of sales and $1 billion of net income. Its total assets are $10 billion. The company’s total assets equal total invested capital, and its capital consists of half debt and half common equity. The firm’s interest rate is 5%, and its tax rate is 25%. What is its profit margin? What is its ROA? What is its ROE? What is its ROIC? Would this firm’s ROA increase if it used less leverage? (The size of...

1) A company had net income of $2,740,000, net sales of $26,500,000, and average total assets...

1) A company had net income of $2,740,000, net sales of $26,500,000, and average total assets of $11,800,000. Its return on total assets equals: Multiple Choice 23.22%. 44.53%. 10.34%. 4.31%. 430.66%. 2) Using the information below, calculate cost of goods sold for the period: Sales revenues for the period $ 1,316,000 Operating expenses for the period 251,000 Finished Goods Inventory, January 1 48,000 Finished Goods Inventory, December 31 53,000 Cost of goods manufactured for the period 552,000 Multiple Choice $798,000....

1. A company had net income of $48,000, net sales of $380,000, and average total assets...

1. A company had net income of $48,000, net sales of $380,000, and average total assets of $280,000. Its profit margin and total asset turnover were respectively: Multiple Choice 1.36%; 0.17. 1.97%; 1.36. 12.63%; 1.36. 1.36%; 12.63. 12.63%; 0.17. 2. Six months ago, a company purchased an investment in stock for $69,000. The investment is classified as available-for-sale securities. This is the company’s first and only investment in available-for-sale securities. The current fair value of the stock is $72,600. The...

Cisco Systems has total assets of $35.841 billion, total debt of $9.112 billion, and net sales...

Cisco Systems has total assets of $35.841 billion, total debt of $9.112 billion, and net sales of $22.835 billion. Its net profit margin for the year is 20 percent, while the operating profit margin is 30 percent. What are Cisco’s net income, EBIT ROA, ROA, and ROE? (Enter amount in billion. Round net income to 3 decimal places, e.g. 25.335. Round EBIT ROA, ROA and ROE to 1 decimal place, e.g.12.2%.) Net income $ billion EBIT ROA % ROA %...

Archware Systems has total assets of $35.594 billion, total debt of $9.678 billion, and net sales...

Archware Systems has total assets of $35.594 billion, total debt of $9.678 billion, and net sales of $22.230 billion. Their net profit margin for the year was 0.23, while the operating profit margin was 30 percent. What is Archware’s net income? (Answer needs to be stated in billions. For example: 2.83) Round to two decimal places.

Firm C has Total Assets of $ 4,000,000. The firm’s Owners Equity at the beginning of...

Firm C has Total Assets of $ 4,000,000. The firm’s Owners Equity at the beginning of the year was $2,800,000. The firm’s Net Income for the year was $ 400,000 and Dividends totaled $ 200,000… There was no Owners Investment for the year. Assuming that this information was for year ended 12/31/2007, please present the firm’s Statement of Owners Equity.

Given the following information, calculate the ROE. Sales = $350,000; Net Income = $50,000; Total assets...

Given the following information, calculate the ROE. Sales = $350,000; Net Income = $50,000; Total assets = $500,000; D/E = 1.5. a. 30% b. 20% c. 15% d. 25% e. 10%

Cleon's company has sales of $225,000, profit margin of 9%, total assets of $280,000, and total...

Cleon's company has sales of $225,000, profit margin of 9%, total assets of $280,000, and total equity of $210,000. The firm does not pay any dividends and does not plan to pay any dividends in the future. Currently, the firm is operating at 80% capacity. All costs vary directly with sales. The firm does not want to obtain any additional external equity. At the sustainable rate of growth, what will be the amount of debt on the firm’s pro-forma balance...