Question 1

The Parodies Corp.has a 22 percent return on equity and a 23 percent payout ratio.What is its sustainable growth rate?

Accepted Answer

Retention ratio = 1 - 0.23 = 0.77Sustainable growth rate = (0.22 × 0.77)/[1 - (0.22 × 0.77)] = 20.39 percent

Question 2

Nelson's Landscaping Services just completed a pro forma statement using the percentage of sales approach.The pro forma has a projected external financing need of -$5,500.What are the firm's options in this case?

Accepted Answer

The answer of Nelson's Landscaping Services just completed a pro...

Question 3

A firm wishes to maintain an internal growth rate of 11 percent and a dividend payout ratio of 24 percent.The current profit margin is 7 percent and the firm uses no external financing sources.What must the total asset turnover rate be?

Accepted Answer

Retention ratio = 1 - 0.24 = 0.76Internal growth rate = 0.11 = (ROA × 0.76)/[1 - (ROA × 0.76)]; ROA = 0.1304Return on assets = 0.1304 = 0.07 × TAT; Total asset turnover = 1.86 times

Question 4

Country Comfort,Inc.had equity of $150,000 at the beginning of the year.At the end of the year,the company had total assets of $195,000.During the year,the company sold no new equity.Net income for the year was $63,000 and dividends were $44,640.What is the sustainable growth rate?

Accepted Answer

Ending equity = $150,000 + ($63,000 - $44,640) = $168,360Return on equity = $63,000/$168,360 = 0.3742Retention ratio = ($63,000 - $44,640)/$63,000 = 0.2914Sustainable growth rate = (0.3742 × 0.2914)/[1 - (0.3742 × 0.2914)] = 12.24 percent

Question 5

Consider the following information for Kaleb's Kickboxing:

What is the sustainable rate of growth?

Accepted Answer

Return on equity = .088 × (1/0.62) × (1 + 0.60) = 0.2270968Retention ratio = 1 - ($15,810/$31,000) = 0.49Sustainable growth rate = (.2270968 × 0.49)/[1 - (.2270968 × 0.49)] = 12.52 percent

Question 6

Seaweed Mfg.,Inc.is currently operating at only 86 percent of fixed asset capacity.Fixed assets are $387,000.Current sales are $510,000 and are projected to grow to $664,000.What amount must be spent on new fixed assets to support this growth in sales?

Accepted Answer

Full capacity sales = $510,000/0.86 = $593,023.26Capital intensity ratio = $387,000/$593,023.26 = 0.652588231Fixed asset need = ($664,000 × 0.652588231) - $387,000 = $46,319

Question 7

The Soccer Shoppe has a 9 percent return on assets and a 25 percent payout ratio.What is its internal growth rate?

Accepted Answer

Retention ratio = 1 - 0.25 = 0.75Internal growth rate = (0.09 × 0.75)/[1 - (0.09 × 0.75)] = 7.24 percent

Question 8

The most recent financial statements for Moose Tours,Inc.follow.Sales for 2009 are projected to grow by 16 percent.Interest expense will remain constant; the tax rate and dividend payout rate will also remain constant.Costs,other expenses,current assets,and accounts payable increase spontaneously will sales.If the firm is operating at full capacity and no new debt or equity is issued,how much external financing is needed to support the 16 percent growth rate in sales? Income Statement

Addition to retained earnings $\$ 66,964$

Accepted Answer

Dividends = ($44,642/$111,606) × $131,670 = $52,668Addition to retained earnings = $131,670 - $52,668 = $79,002Ending retained earnings = $268,000 + $79,002 = $347,002 External financing needed = $590,440 - $598,562 = -$8,122

Question 9

A firm wishes to maintain a growth rate of 8 percent and a dividend payout ratio of 62 percent.The ratio of total assets to sales is constant at 1,and the profit margin is 10 percent.What must the debt-equity ratio be if the firm wishes to keep that ratio constant?

Accepted Answer

Retention ratio = 1 - 0.62 = 0.38Sustainable growth rate = 0.08 = (ROE × 0.38)/[1 - (ROE × 0.38)]; ROE = 0.1949Return on equity = 0.1949 = 0.10 × (1/1) × (1 + D/E); D/E = 0.95

Question 10

The most recent financial statements for Benatar Co.are shown here:  Assets and costs are proportional to sales.Debt and equity are not.The company maintains a constant 40 percent dividend payout ratio.No external equity financing is possible.What is the internal growth rate?

Accepted Answer

Internal growth rate = [($2,665.26/$42,883) × (1 - 0.40)]/{1 - [($2,665.26/$42,883) × (1 - 0.40)]} = 3.87 percent

Question 11

Based on the following information,what is the sustainable growth rate of Hendrix Guitars,Inc.? $$\begin{array} { l l } 
\text { Profit margin } & 5.60 \text { percent } \
\text { Total asset turnover } & 1.76 \
\text { Total debt ratio } & 0.66 \
\text { Payout ratio } & 70 \text { percent }
\end{array}$$

Accepted Answer

Total debt ratio = 0.66 = TD/TATA/TD = 1/0.661 + TD/TE = 1/0.66D/E = 1/[(1/0.66) - 1] = 1.941176Return on equity = 0.056 × 1.76 × (1 + 1.941176) = 0.289882Retention ratio = 1 - 0.7 = 0.3Sustainable growth rate = (0.289882 × 0.3)/[1 - (0.289882 × 0.3)] = 9.52 percent

Question 12

Why do financial managers need to understand the implications of both the internal and the sustainable rates of growth?

Accepted Answer

The answer of Why do financial managers need to understand...

Question 13

A)What are the assumptions that underlie the internal growth rate and B)what are the implications of this rate?

Accepted Answer

The answer of A)What are the assumptions that underlie the...

Question 14

Fixed Appliance Co.wishes to maintain a growth rate of 8 percent a year,a constant debt-equity ratio of 0.42,and a dividend payout ratio of 50 percent.The ratio of total assets to sales is constant at 1.3.What profit margin must the firm achieve?

Accepted Answer

Retention ratio = 1 - 0.50 = 0.50Sustainable growth rate = 0.08 = (ROE × 0.50)/[1 - (ROE × 0.50)]; ROE = 0.14815Return on equity = 0.14815 = PM × (1/1.3) × (1 + 0.42); Profit margin = 13.56 percent

Question 15

Consider the income statement for Heir Jordan Corporation: 
 A 22 percent growth rate in sales is projected.What is the pro forma addition to retained earnings assuming all costs vary proportionately with sales?

Accepted Answer

Retention ratio = $6,692/$10,140 = .65996Pro forma addition to retained earnings = $12,370.80 × .65996 = $8,164

Question 16

What is the sustainable growth rate assuming the following ratios are constant? $$\begin{array} { l l } 
\text { Total asset turnover } & 1.46 \
\text { Profit margin } & 8 \text { percent } \
\text { Equity multiplier } & 1.20 \
\text { Payout ratio } & 32 \text { percent }
\end{array}$$

Accepted Answer

Return on equity = .08 × 1.46 × 1.20 = 0.14016Retention ratio = 1 - 0.32 = 0.68Sustainable growth rate = (.14016 × 0.68)/[1 - (0.14016 × 0.68)] = 10.53 percent

Question 17

Identify the four primary determinants of a firm's growth and explain how each factor could either add to or limit the growth potential of a firm.

Accepted Answer

The answer of Identify the four primary determinants of a...

Question 18

Seaweed Mfg.,Inc.is currently operating at only 84 percent of fixed asset capacity.Current sales are $550,000.What is the maximum rate at which sales can grow before any new fixed assets are needed?

Accepted Answer

Full capacity sales = $550,000/0.84 = $654,761.90Maximum sales growth = (654,761.90/$550,000) - 1 = 19.05 percent

Question 19

The most recent financial statements for Heng Co.are shown here: 
 Assets and costs are proportional to sales.The company maintains a constant 45 percent dividend payout ratio and a constant debt-equity ratio.What is the maximum increase in sales that can be sustained next year assuming no new equity is issued?

Accepted Answer

Return on equity = $13,068/$74,250 = 0.176Retention ratio = 1 - .45 = .55Sustainable growth rate = (0.176 × .55)/[1 - (0.176 × .55)] = .107174Maximum increase in sales = $55,000 × .107174 = $5,894.60

Question 20

Smith & Daughters is getting ready to compile pro forma statements for the next few years.How can the managers establish a reasonable range of growth rates that they should consider during this planning process?

Accepted Answer

The answer of Smith & Daughters is getting ready to...

Quiz 4: Long-Term Financial Planning and Growth