Question 1

Courtney Bike, Co. 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? (Do not round intermediate calculations. Round final answer to one decimal place.)

Accepted Answer

The sustainable growth rate (SGR) formula is: SGR = ROE * (1 - dividend payout ratio), where ROE (Return on Equity) can be calculated from net profit margin, total assets, and total equity (which can be derived from the debt ratio). First, calculate the net income: Net Income = Net Profit Margin * Sales = 0.078 * $4,276,990 = $333,605.22. Then, calculate the equity: Equity = Total Assets * (1 - Debt Ratio) = $2,112,370 * (1 - 0.45) = $1,161,803.5. Now, calculate ROE: ROE = Net Income / Equity = $333,605.22 / $1,161,803.5 = 0.287 or 28.7%. Finally, calculate SGR: SGR = ROE * (1 - Dividend Payout Ratio) = 0.287 * (1 - 0.60) = 0.287 * 0.40 = 0.1148 or 11.5%.

Question 2

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? (Round your final answer to one decimal place.)

Accepted Answer

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Question 3

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 required by this firm to meet its growth expectations?

Accepted Answer

The firm's projected net income for next year is $2,213,564. It pays out 65 percent of its net income as dividends, which equals $1,436,552.60. Therefore, the retained earnings will be $776,011.40 ($2,213,564 - $1,436,552.60). The firm's total assets are $9,751,223. If it grows at a rate of 20 percent next year, its total assets will be $11,701,467.60 ($9,751,223*1.20). The firm's total funding will then be $11,477,479 (total assets - retained earnings). Therefore, the external financing required by the firm will be $1,175,497.20 ($11,477,479 - $10,302,982.80).

Question 4

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

Accepted Answer

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Question 5

Discuss the implications of the internal growth rate.

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Question 6

Sterling Resorts Co. 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, it expects a net income of $3,475,321 and will pay out 45 percent as dividends. What is the external financing required by the firm to meet its growth expectations?

Accepted Answer

The external financing required is calculated by determining the retained earnings and comparing it to the increase in assets needed for growth. Retained earnings = Net income * (1 - Dividend payout ratio) = $3,475,321 * (1 - 0.45) = $1,911,426.55. The increase in assets needed = Total assets * Growth rate = $13,442,975 * 0.25 = $3,360,743.75. External financing required = Increase in assets - Retained earnings = $3,360,743.75 - $1,911,426.55 = $1,449,317.20.

Question 7

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? (Round your final answer to one decimal place)

Accepted Answer

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Question 8

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

Accepted Answer

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Question 9

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 can be calculated using the formula: Sustainable Growth Rate = ROE * (1 - dividend payout ratio). Given ROE = 18.6% and dividend payout ratio = 60%, the calculation is: 18.6% * (1 - 0.60) = 18.6% * 0.40 = 7.44%.

Question 10

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? (Round to two decimal places)

Accepted Answer

The internal growth rate can be calculated using the formula: Internal Growth Rate = (ROE * (1 - Dividend Payout Ratio)) / (1 - (ROE * (1 - Dividend Payout Ratio))). Plugging in Meredith Inc.'s values: ROE = 21.5%, Dividend Payout Ratio = 70% or 0.7, we get Internal Growth Rate = (0.215 * (1 - 0.7)) / (1 - (0.215 * (1 - 0.7))) = 0.0355 or 3.55%.

Question 11

Mandolin Bottlers Co. 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 are total assets? (Round your answer to the nearest dollar.)

Accepted Answer

The internal growth rate formula is given by the retention ratio (b) times the return on assets (ROA), which is net income divided by total assets. We can rearrange this formula to solve for total assets: Total Assets = Net Income / (Internal Growth Rate / Retention Ratio). Plugging in the given numbers: Total Assets = $4,272,335 / (0.086 / 0.65) = $32,290,904 (rounded to the nearest dollar).

Question 12

If Merton Corp. has a ROE of 23.4 percent, what is the plowback ratio required to achieve a sustainable growth rate of 7 percent? (Round to nearest whole number.)

Accepted Answer

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Question 13

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? (In your interim computations, round your ROE percentage to one decimal place.)

Accepted Answer

The sustainable growth rate (SGR) formula is SGR = ROE × (1 - dividend payout ratio), where ROE (Return on Equity) is net income divided by equity. First, calculate equity using the debt ratio: Equity = Total Assets × (1 - Debt Ratio) = $3,812,832 × (1 - 0.47) = $2,020,801. Then, calculate ROE = Net Income / Equity = $736,253 / $2,020,801 = 0.364 or 36.4% (rounded to one decimal place). Finally, calculate SGR = 0.364 × (1 - 0.65) = 0.1274 or 12.74%.

Quiz 19: Financial Planning and Managing Growth