Business Finance Answers_Part_11

Business Finance Answers_Part_11 - CHAPTER 4 B-41 And the...

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CHAPTER 4 B-41 And the additional borrowing will be: Additional borrowing = $100,160.04 – 86,000 Additional borrowing = $14,160.64 The growth rate that can be supported with no outside financing is the internal growth rate. To calculate the internal growth rate, we first need the ROA, which is: ROA = $17,500 / ($86,000 + 58,000) ROA = .1215 or 12.15% This means the internal growth rate is: Internal growth rate = (ROA × b) / [1 – (ROA × b)] Internal growth rate = [.1215(.4686)] / [1 – .1215(.4686)] Internal growth rate = .0604 or 6.04% 23. Since the company issued no new equity, shareholders’ equity increased by retained earnings. Retained earnings for the year were: Retained earnings = NI – Dividends Retained earnings = $19,000 – 2,500 Retained earnings = $16,500 So, the equity at the end of the year was: Ending equity = $135,000 + 16,500 Ending equity = $151,500 The ROE based on the end of period equity is: ROE = $19,000 / $151,500 ROE = .1254 or 12.54% The plowback ratio is: Plowback ratio = Addition to retained earnings/NI Plowback ratio = $16,500 / $19,000 Plowback ratio = .8684 or 86.84% Using the equation presented in the text for the sustainable growth rate, we get: Sustainable growth rate = (ROE × b) / [1 – (ROE × b)] Sustainable growth rate = [.1254(.8684)] / [1 – .1254(.8684)] Sustainable growth rate = .1222 or 12.22% The ROE based on the beginning of period equity is ROE = $16,500 / $135,000 ROE = .1407 or 14.07%
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B-42 SOLUTIONS Using the shortened equation for the sustainable growth rate and the beginning of period ROE, we
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