The ROA of your firm is 5%. The firm also has a debt-asset ratio of 70%. If your firm reinvests 100% of its earnings, at what rate can your assets grow without having to change your capital structure? Further, at what rate can your assets grow without having to raise capital externally? I know the formula for sustainable growth is ROE x b / 1 - ROE x b Internal growth ROA x 1 - b / 1 - (ROA x 1- b) But I do not know how to get the information with what is provided. I think I'm missing a formula to go from ROA (which is the 5% provided) to ROE. Can you show me how to solve this problem? Thank you in advance for your help.
The ROA of your firm is 5%. The firm also has a debt-asset ratio of 70%. If your firm reinvests 100% of its earnings, at what rate can your assets grow without having to change your capital structure? Further, at what rate can your assets grow without having to raise capital externally? I know the formula for sustainable growth is ROE x b / 1 - ROE x b Internal growth ROA x 1 - b / 1 - (ROA x 1- b) But I do not know how to get the information with what is provided. I think I'm missing a formula to go from ROA (which is the 5% provided) to ROE. Can you show me how to solve this problem? Thank you in advance for your help.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter17: Dynamic Capital Structures And Corporate Valuation
Section: Chapter Questions
Problem 2P
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The ROA of your firm is 5%. The firm also has a debt-asset ratio of 70%. If your firm reinvests 100% of its earnings, at what rate can your assets grow without having to change your capital structure?
Further, at what rate can your assets grow without having to raise capital externally?
I know the formula for sustainable growth is
Internal growth
ROA x 1 - b / 1 - (ROA x 1- b)
But I do not know how to get the information with what is provided. I think I'm missing a formula to go from ROA (which is the 5% provided) to ROE.
Can you show me how to solve this problem?
Thank you in advance for your help.
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