Question 1

Dynamo Engines Inc.,has an ROA of 10%,a profit margin of 6%,an assets to equity ratio of 1.30 and a retention ratio of 0.70.What is the firm's sustainable growth rate?

Accepted Answer

The answer of Dynamo Engines Inc.,has an ROA of 10%,a...

Question 2

Knowledge about the sustainable growth rate is important to all but one of the following groups or individuals.

Accepted Answer

Knowledge about the sustainable growth rate is important to all of the above and others as well. This includes investors, creditors, and analysts who want to understand a company's future growth potential and financial sustainability. It also helps in decision-making related to investment, financing, and dividend policies.

Question 3

Corporations tend to be MORE reluctant to increase dividends than to cut them.

Accepted Answer

Corporations are generally more reluctant to cut dividends than to increase them because dividend cuts can signal financial distress or a negative outlook, negatively affecting investor confidence and stock prices.

Question 4

Firms paying excess dividends may cause shareholders to pay taxes sooner and at a higher marginal tax rate than if the firm either held the excess funds,or found additional satisfactory investments.

Accepted Answer

When a firm pays excess dividends, shareholders may have to pay taxes on the income sooner and at a higher marginal tax rate than if the firm either retained the funds or invested in new projects. This is because dividends are typically taxed as income in the year they are received. Additionally, if the shareholders' income is already in a high tax bracket, receiving additional income in the form of dividends may push them into an even higher tax bracket, resulting in a higher marginal tax rate. Thus, paying excess dividends may not be the most tax-efficient way for a firm to distribute its earnings.

Question 5

A firm that grows too rapidly risks requiring too LITTLE financial leverage.

Accepted Answer

A firm that grows too rapidly may require more financial leverage to finance its expansion, as it may need more funds than it can generate internally. However, relying too heavily on debt can also be dangerous, as it increases the firm's financial risk and reduces its flexibility in the long run. Therefore, a balance between debt and equity financing is essential for sustainable growth.

Question 6

A firm that is growing more slowly than its sustainable growth rate may generates excess cash.If the firm chooses to keep the excess cash which of the following is NOT true?

Accepted Answer

Holding on to excess cash may signal underutilization of assets because the excess cash is not being used to expand the business or maximize shareholder value. A firm that is not utilizing its assets effectively is not necessarily attracting unwanted investors or signaling overutilization of assets. However, holding on to excess cash can be a negative stock signal because investors may interpret it as a lack of attractive investment opportunities, which may lead to decreased share prices.

Question 7

If sales growth is SLOWER than the sustainable growth rate then the ROE is also lower.

Accepted Answer

This is because the sustainable growth rate calculates the maximum rate at which a company can grow without external financing while maintaining a constant level of profitability. If sales growth is slower than this rate, it means that the company is not growing as fast as it could without risking its profitability. This means that the return on equity (ROE) will also be lower because the company is not generating as much profit as it could if it were growing at its maximum sustainable rate.

Question 8

Consider the four components identified by the author in the sustainable growth equation.Which if nay of these components are heavily influenced by executive management?

Accepted Answer

The answer of Consider the four components identified by the...

Question 9

Which of following is NOT a variable in the equation for sustainable growth?

Accepted Answer

The sustainable growth rate equation typically includes the profit margin (profit ratio), asset turnover ratio, and leverage ratio, but not the net working capital ratio. The sustainable growth rate is a measure of how much a company can grow its sales, earnings, and dividends without borrowing more money or issuing more equity.

Question 10

The ________ is a two-edged sword in that as its value increases the ROE should increase,but the risk to shareholders also increases.

Accepted Answer

The leverage ratio measures the amount of debt used to finance assets. As the ratio increases, the ROE should increase because debt is cheaper than equity, but the risk to shareholders also increases because they are more vulnerable to default and bankruptcy. Therefore, the leverage ratio is a two-edged sword. The other ratios listed (profit margin, ROA, asset turnover) do not directly measure a company's use of debt, and therefore do not have the same relationship with risk and return.

Question 11

A firm that is growing more slowly than its sustainable growth rate may face which of the following scenarios if it generates excess cash rather than make greater investments in its own business?

Accepted Answer

A firm growing more slowly than its sustainable growth rate and generating excess cash might use that cash in several ways, including acquiring other businesses, increasing dividends, or simply holding onto the cash, becoming "cash rich." These options allow the firm to effectively utilize its excess resources.

Quiz 6: Projecting Financial Requirements and Managing Growth