What new investment is required for a firm that projects 12% growth,has $400,000 in assets,and retained earnings of $40,000?

Question

Quizplus · Accepted Answer

The additional investment required can be calculated using the sustainable growth rate formula:
Sustainable Growth Rate = (Net income/Total assets) * (1-Retention ratio)
= (Net income/Total assets) * (Dividend payout ratio)
Here, we don't have the net income or dividend payout ratio, but we have the ROA (return on assets) = Net income/Total assets = 12%
We can assume a retention ratio of 60% (since dividends are usually around 40%)
Sustainable Growth Rate = 0.12 * 0.6 = 0.072 = 7.2%
Next, we can calculate the additional investment required based on the projected growth rate:
Additional Investment = (Projected growth rate / Sustainable Growth Rate - 1) * Total assets
= (0.12 / 0.072 - 1) * $400,000
= $8,000
Therefore, the best choice is C, $8,000.

What New Investment Is Required for a Firm That Projects