Question

1.OscarButtery, Inc. reported a profit margin of 14.2%, total asset turnover ratio of 1.5times, debt-to-equity ratio of 0.625 times, net income of $775,000, and dividends paid to common stockholders of $321,625. The firm has no preferred stock outstanding. Whatis the firm's internal growth rate?

A.more than 13.4%but less than 14.6%

B.more than 12.2% but less than 13.4%

C.more than 11.0% but less than 12.2%

D.more than 9.8% but less than 11.0%

E.less than 9.8%

2.In 2017, ForsythFlatbread, Inc. had net income of $386,750, sales of $2.35 million, debt of $875,000, debt ratio of0.35 anda dividend payout ratio of 45%. What is the sustainable growth ratefor ForsythFlatbread?

A.more than 15.2% but less than 16.4%

B.morethan 14.0% but less than 15.2%

C.more than 12.8% but less than 14.0%

D.more than 11.6% but less than 12.8%

E.less than 11.6%3.

3. A firm reported the following information for 2017: debt ratio = 68%, capital intensity ratio = 0.625 times, profit margin = 12.8%, and dividend payout ratio = 72%. What is the sustainable growth rate for the firm?

A.more than 31.0%

B.more than 27.8% but less than 31.0%

C.more than 24.6% but less than 27.8%

D.more than 21.4% but less than 24.6%

E.less than 21.4%

4.Which of the following statements is correct?(x)The DuPont analysis calculates ROE as equal to the equation: Profit Margin times Total Asset Turnover times Equity Multiplier(y)If a company has an ROE = 10.5%, equity multiplier = 3, and profit margin of 5%, then the firm’s total asset turnover ratio is equal to 0.70.(z)If a company has an ROE = 15%,total asset turnover ratio = 0.75, equity multiplier = 2.4,then the firm’s profit margin is more than 7.8%.

A.(x), (y) and (z)B. (x) and (y) only C.(x) and (z) onlyD.(y) and (z) onlyE.(x) only

Answer 1

Answer to Question 1:

“more than 13.4% but less than 14.6%”

ROA = Profit Margin * Total Asset Turnover
ROA = 14.20% * 1.50
ROA = 21.30%

Payout Ratio = Dividends / Net Income
Payout Ratio = $321,625 / $775,000
Payout Ratio = 41.50%

Retention Ratio, b = 1 - Payout Ratio
Retention Ratio, b = 1 - 0.4150
Retention Ratio, b = 0.5850

Internal Growth Rate = [ROA * b] / [1 - ROA * b]
Internal Growth Rate = [0.2130 * 0.5850] / [1 - 0.2130 * 0.5850]
Internal Growth Rate = 0.124605 / 0.875395
Internal Growth Rate = 0.142 or 14.2%

Answer to Question 2:

“more than 14.0% but less than 15.2%”

Debt = $875,000
Debt Ratio = 0.35

Debt Ratio = Debt / Total Assets
0.35 = $875,000 / Total Assets
Total Assets = $2,500,000

Equity = Total Assets - Debt
Equity = $2,500,000 - $875,000
Equity = $1,625,000

ROE = Net Income / Equity
ROE = $386,750 / $1,625,000
ROE = 0.238 or 23.80%

Retention Ratio, b = 1 - Payout Ratio
Retention Ratio, b = 1 - 0.45
Retention Ratio, b = 0.55

Sustainable Growth Rate = [ROE * b] / [1 - ROE * b]
Sustainable Growth Rate = [0.2380 * 0.55] / [1 - 0.2380 * 0.55]
Sustainable Growth Rate = 0.1309 / 0.8691
Sustainable Growth Rate = 0.151 or 15.1%

Answer to Question 3:

“more than 21.4% but less than 24.6%”

Equity Ratio = 1 - Debt Ratio
Equity Ratio = 1 - 0.68
Equity Ratio = 0.32

Equity Multiplier = 1 / Equity Ratio
Equity Multiplier = 1 / 0.32
Equity Multiplier = 3.125

Total Asset Turnover = 1 / Capital Intensity Ratio
Total Asset Turnover = 1 / 0.625
Total Asset Turnover = 1.60

ROE = Profit Margin * Total Asset Turnover * Equity Multiplier
ROE = 12.80% * 1.60 * 3.125
ROE = 64.00%

Retention Ratio, b = 1 - Payout Ratio
Retention Ratio, b = 1 - 0.72
Retention Ratio, b = 0.28

Sustainable Growth Rate = [ROE * b] / [1 - ROE * b]
Sustainable Growth Rate = [0.64 * 0.28] / [1 - 0.64 * 0.28]
Sustainable Growth Rate = 0.1792 / 0.8208
Sustainable Growth Rate = 0.218 or 21.8%

Answer to Question 4:

“(x), (y) and (z)”

Statement (x):

ROE = Profit Margin * Total Asset Turnover * Equity Multiplier

Statement (y):

ROE = Profit Margin * Total Asset Turnover * Equity Multiplier
0.1050 = 0.05 * Total Asset Turnover * 3
Total Asset Turnover = 0.70

Statement (z):

ROE = Profit Margin * Total Asset Turnover * Equity Multiplier
0.15 = Profit Margin * 0.75 * 2.40
Profit Margin = 0.083 or 8.3%

So, all statements are correct.