As a firm grows, it must support increases in revenue with new investments in assets. The self-supporting, or sustainable, growth model helps a firm assess how rapidly it can grow, while maintaining a balance between its cash outflows (increases in noncash assets) and inflows (funds resulting from increases in liabilities or equity). Consider the following case of Cold Duck Manufacturing Inc.: Cold Duck Manufacturing Inc. has no debt in its capital structure and has $300,000,000 in assets. Its sales revenues last year were $210,000,000 with a net income of $7,000,000. The company distributed $155,000 as dividends to its shareholders last year. Given the information above, what is Cold Duck Manufacturing Inc.’s sustainable growth rate? 0.05% 2.33% 3.91% 0.51% Which of the following are assumptions of the sustainable (self-supporting) growth model? Check all that apply. The firm pays out a constant proportion of its earnings as dividends. The firm’s total asset turnover ratio remains constant. The firm will not issue any new common stock next year. The firm’s liabilities and equity must increase at the same rate.

As a firm grows, it must support increases in revenue with new investments in assets. The self-supporting, or sustainable, growth model helps a firm assess how rapidly it can grow, while maintaining a balance between its cash outflows (increases in noncash assets) and inflows (funds resulting from increases in liabilities or equity). Consider the following case of Cold Duck Manufacturing Inc.: Cold Duck Manufacturing Inc. has no debt in its capital structure and has $300,000,000 in assets. Its sales revenues last year were $210,000,000 with a net income of $7,000,000. The company distributed $155,000 as dividends to its shareholders last year. Given the information above, what is Cold Duck Manufacturing Inc.’s sustainable growth rate? 0.05% 2.33% 3.91% 0.51% Which of the following are assumptions of the sustainable (self-supporting) growth model? Check all that apply. The firm pays out a constant proportion of its earnings as dividends. The firm’s total asset turnover ratio remains constant. The firm will not issue any new common stock next year. The firm’s liabilities and equity must increase at the same rate.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter3: Evaluation Of Financial Performance

Section: Chapter Questions

Problem 21P

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As a firm grows, it must support increases in revenue with new investments in assets. The self-supporting growth model helps a firm assess how rapidly it can grow, while maintaining a balance between its cash outflows (increases in noncash assets) and inflows (funds resulting from increases in liabilities or equity). Consider this case: Green Caterpillar Garden Supplies Inc. has no debt in its capital structure and has $150 million in assets. Its sales revenues last year were $75 million with a net income of $5 million. The company distributed $1.60 million as dividends to its shareholders last year. What is the firm’s self-supporting, growth rate? (Note: Do not round your intermediate calculations.) 1.08% 2.32% 4.60% 1.00% Which of the following are assumptions of the self-supporting growth model? Check all that apply. The firm’s total asset turnover ratio remains constant. The firm pays no dividends. The firm’s liabilities…
As a firm grows, it must support increases in revenue with new investments in assets. The self-supporting growth model helps a firm assess how rapidly it can grow, while maintaining a balance between its cash outflows (increases in noncash assets) and inflows (funds resulting from increases in liabilities or equity). Consider this case: Green Moose Industries has no debt in its capital structure and has $300 million in assets. Its sales revenues last year were $210 million with a net income of $10 million. The company distributed $1.55 million as dividends to its shareholders last year. What is the firm’s self-supporting, growth rate? (Note: Do not round your intermediate calculations.) 2.90% 0.61% 4.00% 0.52% Which of the following are assumptions of the self-supporting growth model? Check all that apply. The firm must issue the same number of new common shares that it issued last year. Common stock is the firm’s only form of equity.…
Which of the following statements is correct? A. a. Since accounts payable and accruals must eventually be paid, as these accounts increase, AFN also increases. B. b. Suppose a firm is operating its fixed assets below 100 percent capacity but is at 100 percent with respect to current assets. If sales grow, the firm can offset the needed increase in current assets with its idle fixed assets capacity. C. c. If a firm retains all of its earnings, then it will not need any additional funds to support sales growth. D. d. Additional funds needed are typically raised from some combination of notes payable, long-term bonds, and common stock. These accounts are nonspontaneous in that they require an explicit financing decision to increase them. E. e. All of the statements above are false.
Which of the following is correct when the company is deciding if it will undertake an additional funds needed? Additional financing needed only pertains to debt financing When he company is operating at full capacity, fixed assets are excluded in the computation of the amount of external funds needed Growth rate is irrelevant because it seem to be fluctuating every year Additions to retained earnings varies upon on the profit margin ratio and retention ratio of the firm
When the company is working at full capacity, the assets in the AFN equation is the total assets True False Considering each action independently and holding other things constant, which of the following actions would reduce a firm’s need for additional capital? a. An increase in the dividend payout ratio. b. A decrease in the days sales outstanding. c. An increase in expected sales growth. d. A decrease in the profit margin.
Which of the following events is most likely to encourage a firm to INCREASE the amount of debt in its capital structure with other things held constant? Group of answer choices: Management believes that the firm's stock has become overvalued. Its sales become more stable over time. Its degree of operating leverage increases. The costs that would be incurred in the event of bankruptcy increase. The corporate tax rate decreases.
A firm with positive cash flow from financing Is using their excess cash to pay down their debt, buy back stock and pay dividends Is using debt and/or equity financing to grow their asset base and/or cover negative cash flow from operations
A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise. Which of the following conditions would cause the AFN to increase? a. The company's profit margin increases. b. The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity. c. The company increases its dividend payout ratio. d. The company decides to stop taking discounts on purchased materials. e. The company begins to pay employees monthly rather than weekly.
The managers of a firm wish to expand the firm's operations and are trying to determine the amount of debt financing the firm should obtain versus the amount of equity financing that should be raised. The managers have asked you to explain the effects that both of these forms of financing would have on the cash flows of the firm. Write a short response to this request.
Why might one firm have positive cash flows and be headed for financial trouble, whereas another firm with negative cash flows could actually be in a good financial position? (200-300 words)
Identify and explain each of the if it encourage a firm to increase or decrease debt in its capital structure? a. The corporate tax rate increases b. The personal tax rate increases c. Due to market changes, the firm's assets become less liquid d. The firm's sales and earnings become more volatile.
It has been suggested that the WACC of a company is not affected by changes in capital structure, but depends only on business activities. Consider two companies in the same line of business, Loss plc and Shade plc. If Loss plc is financed only by equity and if its cost of equity is 12%, what will be the cost of equity of Shade plc if it is financed 40% by a 7 % bank loan and 60% by equity? (Work to the nearest 1%