Chapter 3 Solutions

Chapter 3 Solutions - Chapter 3 Solutions 5. The maximum...

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Chapter 3 Solutions 5. The maximum percentage sales increase without issung new equity is the sustainable growth rate. To calculate the sustainable growth rate, we first need to calculate the ROE, which is: ROE = NI / TE ROE = $15,312 / $81,000 ROE = .1890 The plowback ratio, b , is one minus the payout ratio, so: b = 1 – .30 b = .70 Now we can use the sustainable growth rate equation to get: Sustainable growth rate = (ROE × b) / [1 – (ROE × b)] Sustainable growth rate = [.1890(.70)] / [1 – .1890(.70)] Sustainable growth rate = .1525 or 15.25% So, the maximum dollar increase in sales is: Maximum increase in sales = $67,000(.1525) Maximum increase in sales = $10,217.93 6. We need to calculate the retention ratio to calculate the sustainable growth rate. The retention ratio is: b = 1 – .10 b = .90 Now we can use the sustainable growth rate equation to get: Sustainable growth rate = (ROE × b ) / [1 – (ROE × b )] Sustainable growth rate = [.15(.90)] / [1 – .15(.90)] Sustainable growth rate = .1561 or 15.61%
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Chapter 3 Solutions - Chapter 3 Solutions 5. The maximum...

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