Chap3First

Chap3First - Homework Manager - Corporate Finance FIN301-004

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Question 1: Score 0/1 Your response Correct response Sustainable Growth Assuming the following ratios are constant, what is the sustainable growth rate? (Input answer as a percent rounded to 2 decimal places, without the percent sign.) Total asset turnover 1.3 Profit margin 6.6% Equity multiplier 1.2 Payout ratio 44% Sustainable growth rate 16.35 (0%)% Sustainable Growth Assuming the following ratios are constant, what is the sustainable growth rate? (Input answer as rounded to 2 decimal places, without the percent sign.) Total asset turnover 1.3 Profit margin 6.6% Equity multiplier 1.2 Payout ratio 44% Sustainable growth rate 6.12 with a tolerance of ± 1.0% % Total grade: 0.0×1/1 = 0% Feedback: We need the return on equity to calculate the sustainable growth rate. Using the DuPont identity, the return on equity is: ROE = (Profit margin)(Total asset turnover)(Equity multiplier) ROE = (0.066)(1.3)(1.2) ROE = 0.103 or 10.3% To find the sustainable growth rate, we need the plowback, or retention, ratio. The plowback ratio is: b = 1 – 0.44 b = 0.56 Now, we can use the sustainable growth rate equation to find: Sustainable growth rate = [(ROE)(b)] / [1 – (ROE)(b)] Sustainable growth rate = [0.103(0.56)] / [1 – 0.103(0.56)] Sustainable growth rate = 0.0612 or 6.12% Question 2: Score 0/1 Your response Correct response Market Value Ratios Riggins Trucking, Inc., has a current stock price of $71. For the past year, the company had net income of $8,000,000, total equity of $30,000,000, sales of $41,000,000 and 3.5 million shares of stock outstanding. The
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Chap3First - Homework Manager - Corporate Finance FIN301-004

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