EBK FUNDAMENTALS OF CORPORATE FINANCE A
10th Edition
ISBN: 9780100342613
Author: Ross
Publisher: YUZU
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 4, Problem 4CRCT
EFN and Growth Rates [LO2, 3] Broslofski Co. maintains a positive retention ratio and keeps its debt–equity ratio constant every year. When sales grow by 20 percent, the firm has a negative projected EFN. What does this tell you about the firm’s sustainable growth rate? Do you know, with certainty, if the internal growth rate is greater than or less than 20 percent? Why? What happens to the projected EFN if the retention ratio is increased? What if the retention ratio is decreased? What if the retention ratio is zero?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
You’ve collected the following information about Odyssey, Inc.:Sales =$165,000Net income = $14,800Dividends = $9,300Total debt = $68,000Total equity = $51,000What is the sustainable growth rate for the company? If it does grow at this rate, how much new borrowing will take place in the coming year, assuming a constant debt –equity ratio? What growth rate could be supported with no outside financing at all?
A 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.
2.
If a firm’s earnings per share grew from $1 to $2 over a 10-year period, the total growthwould be 100%, but the annual growth rate would be less than 10%. True or false? Explain.
(Hint: Solve for the interest rate. Make sure you put the PV or FV as a negative number.)
Chapter 4 Solutions
EBK FUNDAMENTALS OF CORPORATE FINANCE A
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 - Prob. 1QPCh. 4 - Prob. 2QPCh. 4 - Prob. 3QPCh. 4 - Prob. 4QPCh. 4 - Prob. 5QPCh. 4 - Prob. 6QPCh. 4 - Prob. 7QPCh. 4 - Prob. 8QPCh. 4 - Prob. 9QPCh. 4 - Prob. 10QPCh. 4 - Prob. 11QPCh. 4 - Prob. 12QPCh. 4 - Prob. 13QPCh. 4 - Prob. 14QPCh. 4 - Prob. 15QPCh. 4 - Prob. 16QPCh. 4 - Prob. 17QPCh. 4 - Prob. 18QPCh. 4 - Prob. 19QPCh. 4 - Prob. 20QPCh. 4 - Prob. 21QPCh. 4 - Prob. 22QPCh. 4 - Prob. 23QPCh. 4 - Prob. 24QPCh. 4 - Prob. 25QPCh. 4 - Prob. 26QPCh. 4 - Prob. 27QPCh. 4 - Prob. 28QPCh. 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 - Prob. 1MCh. 4 - Prob. 2MCh. 4 - Prob. 3M
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- 4. 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_forward33. Nonconstant Growth. 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 DIV, = $1 per share. (LO7-2) a. What are the expected values of: (i) DIV1, (ii) DIV2, (iii) DIV3, and (iv) DIV4? b. What is the expected stock price 4 years from now? The discount rate is 10%. c. What is the stock price today?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_forward
- An unlevered firm perceives its optimal dividend policy to be a 40 percent payout ratio. Asset turnover is sales/assets = 80%, the profit margin is 10 percent, and the firm has a target growth rate of 5%. a. Is the firm's target growth rate consistent with it other goals? b. If not, how much does it need to increase asset turnover to achieve it goals? c. How much would it need to increase the profit margin instead?arrow_forwardEven Better Products has come out with an even better product. As a result, the firm projects an ROE of 20% and it will maintain a plowback ratio of 0.30. Its earnings this year will be $2 per share. Investors expect a 12% rate of return on the stock. a) At what price an dP/E ratio would you expect the firm to sell? b) What is the present value of growth opportunities?arrow_forwardH3. 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 calculationarrow_forward
- You use a one-stage DDM to value a typical mature U.S. company. Which of the following estimates of its (stable) earnings growth rate would be most reasonable? 30% 5% 25% 20%arrow_forward1. What is the Internal Growth rate for Cafes Richard ? What is the sustainable growth rate for Cafes Richard ? If sales grow at SGR, how much External Financing will be needed for the year 2021 using Percentage of sales approach, assuming that the firm is operating at full capacity? Interest expense and tax rate will not change. Calculate the tax rate (hint: tax rate = tax/taxable income). Please create pro forma statements as well. What's the impact in the new Debt to equity ratio, if any?arrow_forwardA firm wishes to maintain an sustainable growth rate of 10 percent and a dividend payout ratio of 56 percent. The ratio of total assets to sales is constant at 1.1, and the profit margin is 9.6 percent. If the firm also wishes to maintain a constant debt-equity ratio, what must it be? Multiple Choice О 5.86 О 1.37 О 6.86 4.86 3.86arrow_forward
- H3. The value of HILEV firm at the end of one year can be $50 m or $100 m with equal probability of 0.5. The firm has debt with a face value of $50 m that matures in one year. Assume that investors are risk-neutral and the risk free rate is zero. The CEO of the firm decides to substitute assets of the firm with more risky assets immediately, so that the value of the firm at the end of one year is either $30 m or $120 m with equal probability of 0.5. This asset substitution will lead to A. A gain of $10 million for stockholders and a loss of $10 million for bondholders B. A loss of $10 million for stockholders and a gain of $10 million for bondholders C. No gain or loss to debtholders or equity holders D. Both debtholders and equity holders will lose $10 million from the increased risk of the business Show proper step by step calculationarrow_forwardBetter 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_forwardPlease show the solution. Thank you. 1. The Roberto Corporation currently has earnings that are currently has earnings that are P4 per share. In recent years, earnings have been growing at a rate of 7.5% and this rate is expected to continue in the future. If Roberto Corporation has a retention rate of 40 percent and a required rate of return of 14 percent, what is its current value?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
FIN 300 Lab 1 (Ryerson)- The most Important decision a Financial Manager makes (Managerial Finance); Author: AllThingsMathematics;https://www.youtube.com/watch?v=MGPGMWofQp8;License: Standard YouTube License, CC-BY
Working Capital Management Policy; Author: DevTech Finance;https://www.youtube.com/watch?v=yj-XbIabmFE;License: Standard Youtube Licence