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Unformatted text preview: FNCE 3010 (Durham). HW4 (Long-term planning) 1. Testaburger, Inc., uses no external financing and maintains a positive retention ratio. When sales grow by 15 percent, the firm has a negative projected EFN. What does this tell you about the firm’s internal growth rate? How about the sustainable growth rate? At this same level of sales growth, what will happen to the projected EFN if the retention ratio is increased? What if the retention ratio is decreased? What happens to the projected EFN if the firm pays out all of its earnings in the form of dividends? Solution: At a 15% growth rate the negative EFN indicates that there is excess internal financing. So the IGR must be greater than that. Since the SGR uses additional debt financing, it must be greater than the IGR. As the retention ratio is increased, the firm has more internal sources of funding, so the EFN will decline. Conversely, as the retention ratio is decreased, the EFN will rise. If the firm pays out all its earnings in the form of dividends, then the firm has no internal sources of funding (ignoring the effects of accounts payable); the internal growth rate is zero in this case and the EFN will rise to the change in total assets. 2. Thorpe Mfg., Inc., has fixed assets with a book value of $415,000. It is currently operating at only 85 percent of fixed asset capacity. Current sales are $510,000. (a) How fast can sales grow before any new fixed assets are needed? (b) If sales are projected to grow to $680,000, how much in new fixed assets will be needed? Solution: (a) To determine full capacity sales, we divide the current sales by the capacity the company is currently using: Full capacity sales = $510,000 / .85 = $600,000 1 The maximum sales growth is the full capacity sales divided by the current...
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This note was uploaded on 03/31/2008 for the course FNCE 3010 taught by Professor Donchez,ro during the Fall '07 term at Colorado.
- Fall '07
- Corporate Finance