Question

Answer the questions that follow this table – TABLE 2

Income Statement
For the Year 2019
Sales	$28,400
Cost of goods sold	21,200
Depreciation	2,700
Earnings before interest and taxes	$ 4,500
Interest paid	850
Taxable income	$ 3,650
Taxes	1,400
Net income	$ 2,250
Dividends $900
Balance Sheet
End-of-Year 2019
Cash	$   550
Accounts receivable	2,450
Inventory	4,700
Total current assets	$ 7,700
Net fixed assets	16,900
Total assets	$24,600
Accounts payable	$ 2,700
Long-term debt	9,800
Common stock ($1 par value)	8,000
Retained earnings	4,100
Total Liab. & Equity	$24,600
4. Assume this firm decides to maintain a constant debt-equity ratio, what rate of growth can it maintain, assuming that no additional external financing is available Hint: Think about sustainable growth and define it)	Explain
5. Assume that the company wants to grow without leveraging, that is, no debt. What will be its growth rate (Think about internal growth rate and define it).
6. Assume the business is currently operating at maximum capacity. All costs, assets, and current liabilities vary directly with sales. The tax rate and the dividend payout ratio will remain constant. How much additional debt is required if no new equity is raised and sales are projected to increase by 5 percent?
7. Now assume the firm is currently operating at 84 percent of capacity. All costs and net working capital vary directly with sales. The tax rate, the profit margin, and the dividend payout ratio will remain constant. How much additional debt is required if no new equity is raised and sales are projected to increase by 12 percent?

8. What is meant by Capital intensity? Give an example to fully describe

Answer 1

Answer :1

Sustainable Growth Rate: The sustainable growth rate (SGR) is the maximum rate of growth that a company or social enterprise can sustain without having to finance growth with additional equity or debt.

Sustainaible Growth Rate =  Retention Ratio * ROE

= (1-Dividend Payout Ratio) * Net Income/Equity

= (1-(Dividend Paid/Net Income)) * (Net Income / Share Holders' Equity)

= (1-900/2250) * (2250/12100)%

= (1-0.4) * (18.60%)

= 0.6 * 18.60%

= 11.18%

Answer:2

Internal Growth Rate: Internal growth rate is the maximum rate of growth in sales and assets that a company can achieve using only retained earnings. It is the rate of growth up to which the company might not need any external financing.

Internal Growth Rate =  Retention Ratio * ROA

= (1-Dividend Payout Ratio) * (Net Income/Total Assets)

= (1-(Dividend Paid/Net Income)) * (Net Income / Total Assets)

= (1-900/2250) * (2250/24600)%

= (1-0.4) * (18.60%)

= 0.6 * 9.15%

= 5.49%

Answer 3

Retained Earning Addition: Net Income - Dividednd paid = 2250 - 900 = $1350

Opening Retained earning = $4100 - $1350 = $2750

Projected Total Asset = $24,600 * 1.05 = $25,830

Project Accounts Payables = $2700*1.05 = $2,835

Current Long Term Debt = $9,800

Current Common Stock = $8,000

Projected Retained Earning = $(4,100-1350) + (1,350*1.05) = $4167.50

Additional Debt Required = $ 25830 - $2835 - $9800 - $8000 - $5517.50 = 1027.50

Answer 4

Projected Current Asset = $7700 * 1.12 = $8624

Projected Fixed Assets = $16,900

Project Accounts Payables = $2700*1.12 = $3024

Current Long Term Debt = $9,800

Current Common Stock = $8,000

Projected Retained Earning = $(4,100-1350) + (1,350*1.10) = $4262

Additional Debt Required = $ 8624 + $16,900 - $3024 - $9800 - $8000 - $4262 = $438

Answer 5

Capitalintensive firm or industry that requires large amounts of fixed assets and/or cash to operate. Steel, automobile manufacturing, and mining are capital intensive industries.company or industry requiring a great deal of capital to maintain operations. For example, the automobile industry  capitalintensive because, in order to make cars, it requires a lot of workers and expensive equipment that must be properly maintained. Another, smaller scale example is a dentist office, which requires expensive equipment and materials. In order to stay afloat, capital intensive companies need either consistently large profits or inexpensive credit.