CHAPTER 4-2

# CHAPTER 4-2 - Sustainable growth rate =[0.1045.70[1 –...

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The addition to retained earnings is: Addition to retained earnings = \$683.10 – 273.24 Addition to retained earnings = \$409.86 So the EFN is: EFN = Total assets – Total liabilities and equity EFN = \$13,225 – 12,224.86 EFN = \$1,000.14 6. To calculate the internal growth rate, we first need to calculate the ROA, which is: ROA = NI / TA ROA = \$2,262 / \$39,150 ROA = .0578 or 5.78% The plowback ratio, b, is one minus the payout ratio, so: b = 1 – .30 b = .70 Now we can use the internal growth rate equation to get: Internal growth rate = (ROA × b) / [1 – (ROA × b)] Internal growth rate = [0.0578(.70)] / [1 – 0.0578(.70)] Internal growth rate = .0421 or 4.21% 7. To calculate the sustainable growth rate, we first need to calculate the ROE, which is: ROE = NI / TE ROE = \$2,262 / \$21,650 ROE = .1045 or 10.45% The plowback ratio, b, is one minus the payout ratio, so: b = 1 – .30 b = .70 Now we can use the sustainable growth rate equation to get: Sustainable growth rate = (ROE × b) / [1 – (ROE × b)]

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Unformatted text preview: Sustainable growth rate = [0.1045(.70)] / [1 – 0.1045(.70)] Sustainable growth rate = .0789 or 7.89% 8. The maximum percentage sales increase is the sustainable growth rate. To calculate the sustainable growth rate, we first need to calculate the ROE, which is: ROE = NI / TE ROE = \$8,910 / \$56,000 ROE = .1591 or 15.91% The plowback ratio, b, is one minus the payout ratio, so: b = 1 – .30 b = .70 Now we can use the sustainable growth rate equation to get: Sustainable growth rate = (ROE × b) / [1 – (ROE × b)] Sustainable growth rate = [.1591(.70)] / [1 – .1591(.70)] Sustainable growth rate = .1253 or 12.53% So, the maximum dollar increase in sales is: Maximum increase in sales = \$42,000(.1253) Maximum increase in sales = \$5,264.03 9. Assuming costs vary with sales and a 20 percent increase in sales, the pro forma income statement will look like this: HEIR JORDAN CORPORATION Pro Forma Income Statement Sales \$45,600.00...
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CHAPTER 4-2 - Sustainable growth rate =[0.1045.70[1 –...

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