CHAPTER 4-5

# CHAPTER 4-5 - 15 We must first calculate the ROE using the...

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15. We must first calculate the ROE using the DuPont ratio to calculate the sustainable growth rate. The ROE is: ROE = (PM)(TAT)(EM) ROE = (.078)(2.50)(1.80) ROE = .3510 or 35.10% The plowback ratio is one minus the dividend payout ratio, so: b = 1 – .60 b = .40 Now we can use the sustainable growth rate equation to get: Sustainable growth rate = (ROE × b) / [1 – (ROE × b)] Sustainable growth rate = [.3510(.40)] / [1 – .3510(.40)] Sustainable growth rate = .1633 or 16.33% Intermediate 16. To determine full capacity sales, we divide the current sales by the capacity the company is currently using, so: Full capacity sales = \$550,000 / .95 Full capacity sales = \$578,947 The maximum sales growth is the full capacity sales divided by the current sales, so: Maximum sales growth = (\$578,947 / \$550,000) – 1 Maximum sales growth = .0526 or 5.26% 17. To find the new level of fixed assets, we need to find the current percentage of fixed assets to full capacity sales. Doing so, we find: Fixed assets / Full capacity sales = \$440,000 / \$578,947 Fixed assets / Full capacity sales = .76
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