A firm has sales of $10, 000,000 in 2018, and operating income of $1,200,000 and net...

A firm has sales of $10, 000,000 in 2018, and operating income of $1,200,000 and net income of $650,000. The firm has total equity at year end 2017 of $4,000,000, total asset of $7,000,000. It also paid out $195,000 dividend in 2018.

Calculate its equity multiplier.

Use the 3-factor DuPont Identity to calculate its ROE.

What’s its retention ratio?

What’s its sustainable growth rate?

Expert Solution

Answer to Part a.
Equity Multiplier = Total Assets / Total Equity
Equity Multiplier = $7,000,000 / $4,000,000
Equity Multiplier = 1.75

Answer to Part b.
Net Margin = Net Income / Sales * 100
Net Margin = $650,000 / $10,000,000 * 100
Net Margin = 6.50%

Total Asset Turnover = Sales / Total Assets
Total Asset Turnover = $10,000,000 / $7,000,000
Total Asset Turnover = 1.4286 times

ROE = Net Margin * Total Assets Turnover * Equity Multiplier
ROE = 6.50% * 1.4286 * 1.75
ROE = 16.25%

Answer to Part c.
Dividend Payout ratio = Dividend paid / Net Income * 100
Dividend Payout ratio = $195,000 / $650,000 * 100
Dividend Payout ratio = 30%

Retention ratio = 1 - Dividend Payout ratio
Retention ratio = 1 – 0.30
Retention ratio = 0.70 or 70%

Answer to Part d.
Sustainable Growth rate = (ROE * Retention Ratio) / [1 - (ROE * Retention Ratio)]
Sustainable Growth rate = (0.1625 * 0.70) / [1 – (0.1625 * 0.70)]
Sustainable Growth rate = 0.11375 / (1 – 0.11375)
Sustainable Growth rate = 0.11375 / 0.88625
Sustainable Growth rate = 12.83%

jeff jeffy answered 1 year ago

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