Question

A firm has an ROA of 10%, a dividend payout ratio of 40%, an Equity Multiplier of 1.60, what is the Sustainable Growth Rate?

9.04%

6.84%

9.60%

10.62% If full capacity sales levels of existing equipment are $2,000,000 and the firm is currently selling 70% of capacity, what percent can sales grow before new Fixed Assets are required? 42.86% 25.00% 70.00% 30.00% Current Assets = $900; Fixed Assets = $2,500; Accounts Payable = $300; Most recent year Sales of $1,500, PM% = 15%, Dividend Payout of 20%. If next year sales are projected to grow to $1,800, what is the External Financing Needed (EFN)? $360.80 $566.00 $404.00 $548.00

Answer 1

Part 1:

Growth rate (g) = b*r

b = retention ratio

r = Return on Equity

r = ROA * Equity Multiplier

= [Net Income / Assets] * [Assets / Equity]

= 10% * 1.60

= 16%

retention ratio = 1- Div payout ratio

= 1- 0.40

= 0.60 i.e 60%

g = b * r

= 0.6 * 16%

= 9.60%

Part B:

Existing sales = Sales at Full Capicity * Utilised Cacity

= $2,000,000 * 70%

= $1,400,000

Sales that can be increased = Sales at Full Capacity * Idle Capacity

= $2,000,000 * 30%

= $ 600,000

Sales That can be increased = Sales That can be increased / Existing sales

= $ 600,000 / $ 1,400,000

=42.86%

Part 3:

External finance Needed:

EFN =[ (A0 / S0) (S1 - S0) ] - [ (L0 / S0) (S1 - S0) ] - (PM)(S1)*b

• S₀ = Current Sales,
• S₁ = Forecasted Sales
• _A0 = Assets (at time 0) which vary directly with Sales,
• L₀ = Liabilities (at time 0) which vary directly with Sales,
• PM = Profit Margin and
• b = Retention Ratio

Total Assets = FA + CA

= $ 2500 + $ 900

= $3400

b = 1- Div payout ratio

= 1-20%

=80%

EFN = [ (A0 / S0) (S1 - S0) ] - [ (L0 / S0) (S1 - S0) ] - (PM)(S1)*b

= [ ($3400 / $ 1500) ($ 1800 - $ 1500) ] - [ ($300 / $1500) ($1800 - $1500) ] - [(15%)($1800)*80%]

= [(2.27) ($300) ] - [ (0.20) ($300) ] - [(216)]

= $ 680 - $ 60 - $ 216

= $ 404