Question 1

Internal growth rate: Meredith, Inc., has a return on equity of 21.5 percent, an equity ratio of 55 percent, and a dividend payout ratio of 70 percent. What is the company's internal growth rate?

Accepted Answer

The internal growth rate can be calculated using the following formula:

Internal Growth Rate = (Return on Equity × Retention Ratio) ÷ (1 − (Return on Equity × Retention Ratio))

where Retention Ratio = (1 − Dividend Payout Ratio)

Substituting the values given in the question:

Retention Ratio = (1 − 0.70) = 0.30

Internal Growth Rate = (0.215 × 0.30) ÷ (1 − (0.215 × 0.30)) = 0.036 or 3.6%

Therefore, the best choice is B.

Question 2

Sustainable growth rate: Sterling, Inc., currently has sales of $4,512,644 and net income of $736,253. It has a debt ratio of 47 percent and a dividend payout ratio of 65 percent. The company has total assets of $3,812,832. What is the company's sustainable growth rate?

Accepted Answer

First, we need to calculate the return on assets (ROA):

ROA = Net income / Total assets
ROA = $736,253 / $3,812,832
ROA = 0.193 or 19.3%

Next, we need to calculate the sustainable growth rate using the following formula:

Sustainable growth rate = ROA x (1 - Dividend payout ratio) x Debt ratio

Sustainable growth rate = 0.193 x (1 - 0.65) x 0.47
Sustainable growth rate = 0.0677 or 6.77%

Therefore, the sustainable growth rate for Sterling, Inc. is 6.77%. However, since this is an unrealistic number for a company to maintain, we need to compare it to the company's actual growth rate and adjust accordingly. If the company's growth rate exceeds the sustainable growth rate, it may be an indication that the company is relying too heavily on debt or not reinvesting enough of its earnings.

Question 3

External financing needed: Jockey Company has total assets worth $4,417,665. At year-end it will have net income of $2,771,342 and pay out 60 percent as dividends. If the firm wants no external financing, what is the growth rate it can support?

Accepted Answer

The answer of External financing needed: Jockey Company has total...

Question 4

External financing needed: Nederland Finance Company has total assets worth $9,751,223. It is expecting to grow its revenue at a rate of 20 percent next year and will have a net income of $2,213,564 next year. The firm pays out 65 percent of its net income as dividends. What is the external financing needed by this firm to meet its growth expectations?

Accepted Answer

The firm needs to finance 20% growth of its assets, which is $1,950,244.60. Retained earnings are 35% of net income, which is $774,747.40. The external financing needed is the difference: $1,950,244.60 - $774,747.40 = $1,175,497.20.

Question 5

Explain the sustainable growth rate and discuss what it means to a firm's management.

Accepted Answer

The answer of Explain the sustainable growth rate and discuss...

Question 6

Internal growth rate: Mandolin Bottlers has net income of $4,272,335 and retains 65 percent of its income every year. If the company's internal growth rate is 8.6 percent, what is the firm's total assets?

Accepted Answer

The correct answer is A.The internal growth rate (IGR) is the rate at which a company can grow without raising external financing. It is calculated as follows:IGR = (Net income * Retention ratio) / Total assetsIn this case, the net income is $4,272,335, the retention ratio is 65%, and the IGR is 8.6%. Therefore, the total assets are:Total assets = (Net income * Retention ratio) / IGRTotal assets = ($4,272,335 * 0.65) / 0.086Total assets = $32,290,904

Question 7

Sustainable growth rate: If Merton Corp. has a ROE of 23.4 percent, what is the plowback ratio needed to achieve a sustainable growth rate of 7 percent?

Accepted Answer

The answer of Sustainable growth rate: If Merton Corp. has...

Question 8

External financing needed: Sterling Resorts has total assets worth $13,442,975. It is expecting to grow its revenue at a rate of 25 percent next year. For next year they expect a net income of $3,475,321 and will pay out 45 percent as dividends. What is the external financing needed by this firm to meet its growth expectations?

Accepted Answer

Step 1: Calculate the increase in total assets 
New total assets = Old total assets * (1+ revenue growth rate)
New total assets = $13,442,975 * (1+0.25) = $16,803,719.40

Step 2: Calculate the net income available for retention 
Net income available for retention = Net income * (1 - dividend payout ratio)
Net income available for retention = $3,475,321 * (1-0.45) = $1,911,926.55

Step 3: Calculate the increase in retained earnings 
Increase in retained earnings = Net income available for retention - Increase in dividends 
Increase in retained earnings = $1,911,926.55 - ($3,475,321*0.45) = $34,676.55

Step 4: Calculate the external financing needed 
External financing needed = Increase in total assets - Increase in retained earnings
External financing needed = $16,803,719.40 - $34,676.55 = $16,769,042.85
Therefore, the external financing needed by this firm to meet its growth expectations is $1,449,317.20 (rounded to the nearest cent). Option B is correct.

Question 9

Sustainable growth rate: If Newell Corp. has a ROE of 18.6 percent and a dividend payout ratio of 60 percent, what is its sustainable growth rate?

Accepted Answer

The sustainable growth rate (SGR) is calculated using the formula: SGR = ROE * (1 - Dividend Payout Ratio). For Newell Corp., SGR = 18.6% * (1 - 0.60) = 18.6% * 0.40 = 7.44%, which is approximately 7.4%.

Question 10

Explain how the strategic plan, investment plan, and financing plan integrate to help management do financial planning.

Accepted Answer

The answer of Explain how the strategic plan, investment plan,...

Question 11

External financing needed: Triumph Company has total assets worth $6,413,228. Next year it expects a net income of $3,145,778 and will pay out 70 percent as dividends. If the firm wants to limit its external financing to $1 million, what is the growth rate it can support?

Accepted Answer

The answer of External financing needed: Triumph Company has total...

Question 12

Sustainable growth rate: Courtney Bike Company has a net profit margin of 7.8 percent, a debt ratio of 45 percent, total assets of $2,112,370, and sales of $4,276,990. If the company has a dividend payout ratio of 60 percent, what is the company's sustainable growth rate?

Accepted Answer

The sustainable growth rate (SGR) is calculated using the formula: SGR = ROE * (1 - Dividend Payout Ratio). First, calculate ROE: ROE = Net Profit Margin * (1 - Debt Ratio) * (Sales / Total Assets). Then, use the ROE to find SGR.

Question 13

Discuss the implications of the internal growth rate.

Accepted Answer

The answer of Discuss the implications of the internal growth...

Quiz 19: Strategic Financial Planning and Forecasting