Question

1. If a Corp has a 13% ROA and a 20% payout (dividend) ratio, what is its sustainable growth rate? If it is debt-free, what is its internal growth rate?
2. A company has net income of $265,000, a profit margin of 9.3%, and an accounts receivable balance of $145,000. Assuming 40% of sales are on credit, what is the company’s days sales in receivables?
3. A company wishes to maintain a growth rate of 12% per year and not exceed a debt-to-equity ratio of 0.40. Profit margin is 5.3% and the ratio of total assets to sales is constant at 0.75. Is this growth rate possible? To put it another way, what dividend payout ratio would give a sustainable rate of 12% annual growth?

4. Fill in the table (Annual Compounding)

Present Value	Years	Interest Rate	Future Value
	3	7%	14,000
	5	5%	20,000
	7	5%	40,000
	10	8%	40,000
	30	4%	100,000

5. Fill in the table (Annual compounding)

Present Value	Years	Interest Rate	Future Value
5,000	3	5%
20,000	5	7%
50,000	7	10%
50,000	10	15%
100,000	30	20%

6. Fill in the table (Annual compounding)

Present Value	Years	Interest Rate	Future Value
10,000	3		14,000
10,000	5		20,000
10,000	7		40,000
10,000	10		40,000
10,000	30		100,000

7. Fill in the table (Annual compounding)

Present Value	Years	Interest Rate	Future Value
5,000		3%	10,000
5,000		5%	10,000
5,000		10%	10,000
5,000		30%	10,000

Answer 1

1. As the company is debt free so RoE = RoA.

Sustainable growth rate(g) = RoE * (1- Dividend payout)

So here RoE = 13%

Dividend payout = 20%

put the values in formula

so g = 13% * (1- 20%)

g = 13% * 0.80

g = 10.4%.

2 . Days sales receivables = ( account receivable / total credit sales in accounting period)* days in accounting period

here, account rece = 145,000

days in the accounting period = 365

total credit sales = as given in question 40% of total sales. Which is = 40%* sales

now we need to have sales number for this we have profit margin number and net income

so we know the formula : profit margin = net income/ sales

here profit margin = 9.3% ans net income = 265,000

put the values in formula to calculate sales

sales = (265,000*100)/9.3

so sales = 28,49,462.36 usd

now calculate total credit sales = 40% of 28,49,462.36 = 1,139,784.94 usd

now put values in days sales receivables formula =(145,000/1,139,784.94)*365 = 46.4 days.

3. we need to use dupont analysis here

RoE = Net profit margin * total asset turnover * financial leverage

Net profit margin = 5.3%

total asset turnover = 1/0.75

Financial leverage = (debt +equity)/equity

here D/E = 0.4

so D+E = 1.4

Financial leverage = 1.4/1 = 1.4

put the values in formula

RoE = 5.3% * 1/0.75 * 1.4

RoE = 9.89%

no this growth rate is not possible as g = RoE * retention ratio

even if company retains 100% of its earnings it will be able to sustain maximumm growth of 9.89%.

no, company can not sustain 12% growth rate.

4. here FV = PV* ( 1+ interest rate)^n

in first part FV = 14000

interest rate 7%

n = 3 years

so PV = 11,428

same way calculate other numbers.

in second table also we will put PV, N and Interest rate and calculate FV

and in third table same way calculate n