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Unformatted text preview: g PM Total equity Projected growth in sales Profit margin b Retention (plowback) ratio Show that EFN can be written as: EFN PM(S)b [A PM(S)b] g (1 g). Hint: Asset needs will equal A g. The addition to retained earnings will equal PM(S)b 28. Sustainable Growth Rate Based on the results in Problem 27, show that the internal and sustainable growth rates can be calculated as shown in equations 3.23 and 3.24. Hint: For the internal growth rate, set EFN equal to zero and solve for g. 29. Sustainable Growth Rate growth rate as: Sustainable growth rate In the chapter, we discussed one calculation of the sustainable ROE b ___________ 1 ROE b In practice, probably the most commonly used calculation of the sustainable growth rate is ROE b. This equation is identical to the two sustainable growth rate equations presented in the chapter if the ROE is calculated using the beginning of period equity. Derive this equation from the equation presented in the chapter. 30. Sustainable Growth Rate Use the sustainable growth rate equations from the previous problem to answer the following questions. No Return, Inc., had total assets of $340,000 and equity of $180,000 at the beginning of the year. At the end of the year, the company had total assets of $410,000. During the year the company sold no new equity. Net income for the year was $105,000 and dividends were $76,000. What is the approximate sustainable growth rate for the company? What is the exact sustainable growth rate? What is the approximate sustainable growth rate if you calculate ROE based on the beginning of period equity? Is this number too high or too low? Why? S&P PROBLEMS
w w w. m h h e . c o m / e d u m a r k e t i n s i g h t 1. Calculating the Du Pont Identity Find the annual income statements and balance sheets for Dow Chemical (DOW) and Merck (MRK). Calculate the Du Pont identity for each company for the most recent three years. Comment on the changes in each component of the Du Pont identity for each company over this period and compare the components between the two companies. Are the results what you expected? Why or why not? 2. Ratio Analysis Find and download the “Profitability” spreadsheet for Southwest Airlines (LUV) and Continental Airlines (CAL). Find the ROA (Net ROA), ROE (Net ROE), PE ratio (P/E-high and P/E-low), and the market-to-book ratio (Price/Book-high and Price/Book-low) for each company. Since stock prices change daily, PE and market-to-book ratios are often reported as the highest and lowest values over the year, as is done in this instance. Look at these ratios for both companies over the past five years. Do you notice any trends in these ratios? Which company appears to be operating at a more efficient level based on these four ratios? If you were going to invest in an airline, which one (if either) of these companies would you choose based on this information? Why? 3. Sustainable Growth Rate Use the annual income statements and balance sheets under the “Excel Analyt...
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This note was uploaded on 10/28/2009 for the course FINA 505 taught by Professor Deborahcernauskas during the Summer '09 term at Northern Illinois University.
- Summer '09