Fundamentals of Corporate Finance, 11th Edition (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9781259298707
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 4, Problem 15QP
Sustainable Growth [LO3] Assuming the following ratios are constant, what is the sustainable growth rate?
| Total asset turnover | = 3.40 |
| Profit margin | = 5.2 % |
| Equity multiplier | = 1.30 |
| Payout ratio | = 35% |
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H3.
A firm wishes to maintain an sustainable growth rate of 9 percent and a dividend payout ratio of 64 percent. The ratio of total assets to sales is constant at 0.9, and the profit margin is 10.1 percent. If the firm also wishes to maintain a constant debt-equity ratio, what must it be?
Please show proper step by step calculation
(a)What is the significance of the internal growth rate? The sustainablegrowthrate?
(b)Assume that Angostura is currently operating at fullcapacity.
-All costs/expenses/income and net working capital vary directly withsales/revenue.
-Interest Expenses will remain unchanged.
-The tax rate and the dividend pay-out ratiowill remainconstant.How much additional debt is required, if any, if no new equity is raised and sales/revenue are projected to increaseby10%?(20Marks)
NOTE:-Tax Rate must be calculated (2 decimalplaces)
-Pro forma statements are to be prepared (Round all figures to the nearestdollar)
(c)Based on your answer from (b) above, how can Angostura obtain the external financing needed (if necessary), or, if the company has excess financing, how can they utilize this?
Sustainable Growth Rate The Raindrop Company has an ROE of 12.1 percent and a payout ratio of 25 percent.a. What is the company’s sustainable growth rate?b. Can the company’s actual growth rate be different from its sustainable growth rate? Why or why not?c. How can the company increase its sustainable growth rate?
Chapter 4 Solutions
Fundamentals of Corporate Finance, 11th Edition (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 4.1 - What are the two dimensions of the financial...Ch. 4.1 - Prob. 4.1BCQCh. 4.2 - Prob. 4.2ACQCh. 4.2 - Prob. 4.2BCQCh. 4.3 - Prob. 4.3ACQCh. 4.3 - Prob. 4.3BCQCh. 4.4 - How is a firms sustainable growth related to its...Ch. 4.4 - What are the determinants of growth?Ch. 4.5 - What are some important elements that are often...Ch. 4.5 - Why do we say planning is an iterative process?
Ch. 4 - Prob. 4.1CTFCh. 4 - Prob. 4.2CTFCh. 4 - A firm has current sales of 272,600 with total...Ch. 4 - Prob. 4.4CTFCh. 4 - What is generally considered when compiling a...Ch. 4 - Sales Forecast [LO1] Why do you think most...Ch. 4 - Sustainable Growth [LO3] In the chapter, we used...Ch. 4 - External Financing Needed [LO2] Testaburger, Inc.,...Ch. 4 - EFN and Growth Rates [LO2, 3] Broslofski Co....Ch. 4 - Prob. 5CRCTCh. 4 - Prob. 6CRCTCh. 4 - Prob. 7CRCTCh. 4 - Prob. 8CRCTCh. 4 - Cash Flow [LO4] Which was the biggest culprit...Ch. 4 - Prob. 10CRCTCh. 4 - Pro Forma Statements [LO1] Consider the following...Ch. 4 - Pro Forma Statements and EFN [LO1, 2] In the...Ch. 4 - Prob. 3QPCh. 4 - EFN [LO2] The most recent financial statements for...Ch. 4 - EFN [LO2] The most recent financial statements for...Ch. 4 - Calculating Internal Growth [LO3] The most recent...Ch. 4 - Calculating Sustainable Growth [LO3] For the...Ch. 4 - Sales and Growth [LO2] The most recent financial...Ch. 4 - Calculating Retained Earnings from Pro Forma...Ch. 4 - Prob. 10QPCh. 4 - EFN and Sales [LO2] From the previous two...Ch. 4 - Internal Growth [LO3] If Stone Sour Co. has an ROA...Ch. 4 - Sustainable Growth [LO3] If Gold Corp. has an ROE...Ch. 4 - Sustainable Growth [L03] Based on the following...Ch. 4 - Sustainable Growth [LO3] Assuming the following...Ch. 4 - Full-Capacity Sales [LO1] Southern Mfg., Inc., is...Ch. 4 - Fixed Assets and Capacity Usage [LO1] For the...Ch. 4 - Growth and Profit Margin [LO3] Dante Co. wishes to...Ch. 4 - Growth and Assets [LO3] A firm wishes to maintain...Ch. 4 - Sustainable Growth [LO3] Based on the following...Ch. 4 - Sustainable Growth and Outside Financing [LO3]...Ch. 4 - Sustainable Growth Rate [LO3] Gilmore, Inc., had...Ch. 4 - Internal Growth Rates [LO3] Calculate the internal...Ch. 4 - Prob. 24QPCh. 4 - Prob. 25QPCh. 4 - Calculating EFN [LO2] In Problem 24, suppose the...Ch. 4 - EFN and Internal Growth [LO2, 3] Redo Problem 24...Ch. 4 - EFN and Sustainable Growth [LO2, 3] Redo Problem...Ch. 4 - Constraints on Growth [LO3] Volbeat, Inc., wishes...Ch. 4 - EFN [LO2] Define the following:...Ch. 4 - Growth Rates [LO3] Based on the result in Problem...Ch. 4 - Sustainable Growth Rate [LO3] In the chapter, we...Ch. 4 - Calculate the internal growth rate and sustainable...Ch. 4 - SS Air is planning for a growth rate of 12 percent...Ch. 4 - Prob. 3M
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- Better Mousetraps has come out with an improved product, and the world is beating a path to its door. As a result, the firm projects growth of 20% per year for four years. By then, other firms will have copycat technology, competition will drive down profit margins, and the sustainable growth rate will fall to 5%. The most recent annual dividend was DIV1 = $1 per share. What are the expected values of (i) DIV1 , (ii) DIV2, (iii) DIV3, and (iv) DIV4? What is the expected stock price four years from now? The discount rate is 10%. What is the stock price today? Find the dividend yield, DIV1/P0. What will next year's stock price, P1, be? What is the expected rate of return to an investor who buys the stock now and sells it in one year?arrow_forward4. Compute the value of Better Mousetraps for assumed sustainable growth rates of 6% through 9%, in increments of .5%.5. Compute the percentage change in the value of the firm for each 1 percentage point increase in the assumed final growth rate, g.6. What happens to the sensitivity of intrinsic value to changes in g? What do you conclude about the reliability of estimates based on the dividend growth model when the assumed sustainable growth rate begins to approach the discount rate?arrow_forward4) A project is predicted to have a return of -£16m in a recession, and the probability of a recession is estimated to be 0.25. In a growth period the return would be 16m (with probability 0.50) and in a boom the return would be £24m (with probability 0.25). What is the expected return? A) £24m B) £50m C) £10m D) £80marrow_forward
- The Stieben Company has determined that the following will be true next year: T(ratio of total assets of sales)=1 P(net profit of margin)=5% d(dividend pay out ratio)=50% L(debt equity ratio)=1 a) What is Stieben's sustainable growth rate in sales? b)Can Stieben's actual growth rate in sales be different from its sustainable growth rate? Why or why not? c) How can Stieben change its sustainable growth?arrow_forwardHow would an increase in each of the following factors affect the AFN?1. Payout ratio2. Capital intensity ratio, A0*/S03. Profit margin4. Days sales outstanding, DSO5. Sales growth rateIs it possible for the AFN to be negative? If so, what would this indicate?If excess capacity exists, how would that affect the calculated AFN?arrow_forwardThe relationship between Firm Z's growth potential and its external financing needed is: EFN = –2,275 + 147,725g What is the growth rate when EFN is zero? Multiple Choice 20% 5.25% 0% 1.54% 64.93%arrow_forward
- This is the full question Better Mousetraps has come out with an improved product, and the world is beating a path to its door. As a result, the firm projects growth of 20% per year for 4 years. By then, other firms will have copycat technology, competition will drive down profit margins, and the sustainable growth rate will fall to 5%. The most recent annual dividend was DIV0 = $1 per share. Compute the value of Better Mousetraps for assumed sustainable growth rates of 6% through 9%, in increments of 0.5% and compute the percentage change in the value of the firm for each 1 percentage point increase in the assumed final growth rate, g. (Do not round intermediate calculations. Round your answers to 2 decimal places.)arrow_forward10. A project is predicted to make an NPV of £24m in a boom, £16m in a medium growth economy and lose £16m in a recession. There is a 25% chance of a recession, a 25% chance of a boom and a 50% chance of a medium growth economy. What is the expected NPV (ENPV)? A) £10m B) £24m C) £50m D) £80marrow_forwardA firm wants a sustainable growth rate of 3.73 percent while maintaining a dividend payout ratio of 39 percent and a profit margin of 8 percent. The firm has a capital intensity ratio of 2. What is the debt-equity ratio that is required to achieve the firm's desired rate of growth?arrow_forward
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