To calculate: The sustainable growth rate, the number of additional borrowings, and the growth rate without any outside financing.
Introduction:
The rate of sustainable growth is the highest growth rate which can be achieved without the external equity financing.
Answer to Problem 43QP
The sustainable growth rate and the additional borrowing of Company E are 13.61% and $9,117.35 respectively. The internal growth rate is 7.41%.
Explanation of Solution
Given information:
The sales of Company E are $275,000, net income is $19,000, dividends are $8,100, total debt is $67,000, and the total equity is $91,000.
Formula to compute the retention ratio:
Compute the retention ratio:
Hence, the retention ratio is 0.5737.
Formula of DuPont identity to compute ROE (
Compute ROE (Return on equity):
Hence, the ROE is 20.88%.
Formula to calculate the sustainable growth rate:
Where,
ROE denotes the return on equity.
b denotes the retention or plowback ratio.
Compute the maximum sustainable growth rate:
Hence, the sustainable growth rate is 0.1361 or 13.61%.
Formula to compute the net total assets:
Compute the net total assets
Hence, the new total assets are $179,500.62.
Formula to compute the net total debt:
Compute the net total debt:
Hence, the new total debt is $76,117.35.
Formula to compute the additional borrowings:
Compute the additional borrowings:
Hence, the additional borrowing is $9,117.35.
Formula to compute the ROA (Return on assets):
Compute the ROA (Return on assets):
Hence, the ROA is 12.03%.
Formula to compute the internal growth rate:
Where,
ROA denotes the return on assets.
b denotes the retention or plowback ratio.
Calculate the internal growth rate:
Hence, the internal growth rate is 7.41%.
Want to see more full solutions like this?
Chapter 3 Solutions
Connect 1-Semester Access Card for Essentials Corporate Finance
- A firm wishes to maintain an sustainable growth rate of 12 percent and a dividend payout ratio of 50 percent. The ratio of total assets to sales is constant at 1, and the profit margin is 8.6 percent. If the firm also wishes to maintain a constant debt-equity ratio, what must it be?arrow_forwardJasmine Manufacturing wishes to maintain a sustainable growth rate of 9.25 percent a year, a debt-equity ratio of .50, and a dividend payout ratio of 27.5 percent. The ratio of total assets to sales is constant at 1.25. What profit margin must the firm achieve in order to meet its growth rate goal?arrow_forwardThe Glexon mill has total assets of $91,600, current liabilities of $9,700, dividends paid of $2,000, net sales of $38,400, and net income of $5,400. Assume that all costs, assets, and current liabilities change spontaneously with sales. The tax rate and dividend payout ratios remain constant. If the firm's managers project a firm growth rate of 9 percent for next year, what will be the amount of external financing needed to support this level of growth? Assume the firm is currently operating at full capacity. Select one: a. EFN=6609$ b. EFN=3.609$ c. None of the other three answers d. EFN=3609$arrow_forward
- Jasmine Manufacturing wishes to maintain a sustainable growth rate of 10.25 percent a year, a debt-equity ratio of .46, and a dividend payout ratio of 29.5 percent. The ratio of total assets to sales is constant at 1.29. What profit margin must the firm achieve?arrow_forwardI need detailed explanation for the following question If a firm bases its growth projection on the rate of sustainable growth, shows positive net income, and has a dividend payout ratio of 30 percent, then the: A. fixed assets will have to increase at the same rate, even if the firm is currently operating at only 78 percent of capacity.B. number of common shares outstanding will increase at the same rate of growth.C. debt-equity ratio will have to increase.D. debt-equity ratio will remain constant while retained earnings increase.E. fixed assets, the debt-equity ratio, and number of common shares outstanding will all increasearrow_forwardGbenda Corporation has sales of $91,200, net income of $18,240, dividends paid of $3,830, total assets of $456,000, and total liabilities of $182,400. Assume that all costs and assets change spontaneously with sales. The tax rate and dividend payout ratios remain constant. If the firm’s managers project a firm growth rate of 10 percent for next year, what will be the amount of external financing needed to support this level of growth? Assume the firm is currently operating at full capacity.Multiple Choice- $25,536- $29,749- $45,600- $65,664- $41,387arrow_forward
- What is the cash cow value and the value of its growth opportunities (NPVGO) if a corporation has current earnings of $5 per share and expects to be able to make an investment of 20% of its earnings next year in a new one-time project with an expected return on invested capital of 24%? The discount rate for the firm is 8%. Cash cow value is $62.50 and NPVGO is $1.85 Cash cow value is $20.83 and NPVGO is $2 Cash cow value is $62.50 and NPVGO is $14 Cash cow value is $25.00 and NPVGO is $3 Cash cow value is $25.00 and NPVGO is $3arrow_forwardA company projects a rate of return of 20% on new projects. Management plans to plow back 20% of all earnings into the firm. Earnings this year will be $6 per share, and investors expect a rate of return of 12% on stocks facing the same risks as this company. What is the sustainable growth rate? What is the stock price? What is the present value of growth opportunities (PVGO)? What is the P/E ratio? What would the price and P/E ratio be if the firm paid out all earnings as dividends? Please show workings with formulas.arrow_forwardWanbay Corporation is interested in estimating its additional financing needed to support a growth in sales next year. Last year, revenues were RM1million; net profit margin was 6 percent; investment in assets was RM750,000; payables and accruals were RM100,000; stockholders’ equity at the end of the year was RM450,000. The venture did not pay out any dividends and does not expect to pay dividends for the future. Elaborate the concept of sustainable sales growth rates in relation to the additional fund needed (AFN). Calculate the additional fund needed (AFN) next year to support a 30 percent increase in sales. If the expected sales growth were only 15 percent, compute the change in the additional fund needed (AFN).arrow_forward
- XYZ Corp. is anticipating a sustained growth rate of 15% per year. Is it possible for them to achieve this growth rate given the following numbers. Debtequity ratio of 0.40 times Profit margin is 5.3 percent Capital Intensity Ratio is 0,75 times to answer: determine what the dividend payout ratio must be. How do you interpret the result?arrow_forwardAn industrial firm with assets of $100 million is exploring the benefit of leveraging the balance sheet given expectations of economic growth. Currently, the firm is earning a return on assets of 9.00%, a return on equity of 15.00%, retains a debt ratio of 40% (equity to assets of 60%). The board of directors has requested management consider changing the debt ratio to 60% (equity to assets of 40%). The new debt will cost 4.00% given a credit rating downgrade. The firm will apply the proceeds of new debt to repurchase stock at book value. The firm is taxed @ 20% but expects that rate to rise in the future. First, estimate how the change in capital structure will impact pro forma net income, return on assets, and return on equity. Second, briefly indicate the advantages and risks of relying on additional debt to leverage the balance sheet.arrow_forwardPlank’s Plants had net income of $3,000 on sales of $40,000 last year. The firm paid a dividend of $1,500. Total assets were $200,000, of which $140,000 was financed by debt. What is the firm’s sustainable growth rate? If the firm grows at its sustainable growth rate, how much debt will be issued next year? What would be the maximum possible growth rate if the firm did not issue any debt next year?arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT