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CHAPTER 4-7

# CHAPTER 4-7 - ROE =(PM(TAT(EM ROE =.048(1.25(1 1.86 ROE...

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Unformatted text preview: ROE = (PM)(TAT)(EM) ROE = (.048)(1.25)(1 + 1.86) ROE = .1714 or 17.14% Now we can calculate the retention ratio as: b = 1 – .30 b = .70 Finally, putting all the numbers we have calculated into the sustainable growth rate equation, we get: Sustainable growth rate = (ROE × b) / [1 – (ROE × b)] Sustainable growth rate = [.1714(.70)] / [1 – .1714(.70)] Sustainable growth rate = .1364 or 13.64% 22. To calculate the sustainable growth rate, we first must calculate the retention ratio and ROE. The retention ratio is: b = 1 – \$9,300 / \$17,500 b = .4686 And the ROE is: ROE = \$17,500 / \$58,000 ROE = .3017 or 30.17% So, the sustainable growth rate is: Sustainable growth rate = (ROE × b) / [1 – (ROE × b)] Sustainable growth rate = [.3017(.4686)] / [1 – .3017(.4686)] Sustainable growth rate = .1647 or 16.47% If the company grows at the sustainable growth rate, the new level of total assets is: New TA = 1.1647(\$86,000 + 58,000) = \$167,710.84 To find the new level of debt in the company’s balance sheet, we take the percentage of debt in...
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