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Question 1:
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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:
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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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 Spring '07
 ANDELIN,STEVENLE
 Corporate Finance

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