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CHAPTER 4-4

CHAPTER 4-4 - ratio is b = 1 –.25 b =.75 Now we can use...

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Pro Forma Balance Sheet Assets Liabilities and Owners’ Equity Current assets Current liabilities Cash \$ 3,507.50 Accounts payable \$ 1,495.00 Accounts receivable 7,935.00 Notes payable 6,800.00 Inventory 8,740.00 Total \$ 8,295.00 Total \$20,182.50 Long-term debt 25,000.00 Fixed assets Net plant and Owners’ equity equipment 39.675.00 Common stock and paid-in surplus \$ 15,000.00 Retained earnings 12,846.40 Total \$ 27,846.40 Total liabilities and owners’ Total assets \$ 59,857.50 equity \$ 61,141.40 So the EFN is: EFN = Total assets – Total liabilities and equity EFN = \$59,857.50 – 61,141.40 EFN = –\$1,283.90 12. We need to calculate the retention ratio to calculate the internal growth rate. The retention ratio is: b = 1 – .20 b = .80 Now we can use the internal growth rate equation to get: Internal growth rate = (ROA × b) / [1 – (ROA × b)] Internal growth rate = [.08(.80)] / [1 – .08(.80)] Internal growth rate = .0684 or 6.84% 13. We need to calculate the retention ratio to calculate the sustainable growth rate. The retention
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Unformatted text preview: ratio is: b = 1 – .25 b = .75 Now we can use the sustainable growth rate equation to get: Sustainable growth rate = (ROE × b) / [1 – (ROE × b)] Sustainable growth rate = [.15(.75)] / [1 – .15(.75)] Sustainable growth rate = .1268 or 12.68% 14. We first must calculate the ROE to calculate the sustainable growth rate. To do this we must realize two other relationships. The total asset turnover is the inverse of the capital intensity ratio, and the equity multiplier is 1 + D/E. Using these relationships, we get: ROE = (PM)(TAT)(EM) ROE = (.082)(1/.75)(1 + .40) ROE = .1531 or 15.31% The plowback ratio is one minus the dividend payout ratio, so: b = 1 – (\$12,000 / \$43,000) b = .7209 Now we can use the sustainable growth rate equation to get: Sustainable growth rate = (ROE × b) / [1 – (ROE × b)] Sustainable growth rate = [.1531(.7209)] / [1 – .1531(.7209)] Sustainable growth rate = .1240 or 12.40%...
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