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Chapter 8 Solutions

# Chapter 8 Solutions - 8 1 Using the template below a The...

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8-­‐1 g* = 14.0% Initial Equity Investment Sales Initial Equity + Retained Earnings Year 2 Sales \$100 \$800 \$114 \$912 X X X LEVERAGE TURNOVER ROS RETENTION LEVERAGE 4 2 7% 25.0% 4 \$14 = = = Initial Total Assets Net Income Dividend Payout Ending Total Assets \$400 \$56 75.0% \$456 E= \$100 \$42 E= \$114 D= \$300 D= \$342 THE SUSTAINABLE GROWTH MODEL STARTING BALANCE SHEET YEAR 1 INCOME STATEMENT ENDING BALANCE SHEET Using the template below: a. The sustainable growth rate, g* is 14%. b. An ini>al equity investment of \$274 results in expected Year 2 sales of \$2,500. c. If the firm pays no dividends, i.e., the reten>on ra>o is 100%, g* increases to 56%. d. A financial leverage ra>o of 7.14 results in a g* of 25%.

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8-­‐2 a. What is the sustainable growth rate, g*? Assumptions EBIT/Sales 15.00% Sales/Assets 2.00 Assets/Equity 2.00 Dividend Payout Ratio 10.00% Interest Rate 10.00% Tax Rate 40.00% EBIT per Dollar of Sales 0.150 Assets per Dollar of Sales 0.500 Equity per Dollar of Sales 0.250 Sustainable Growth Rate 27.00% b. How does g* change in response to reductions by half in the variables? Assumptions Assumptions Assumptions Assumptions Assumptions Assumptions EBIT/Sales 7.50% EBIT/Sales 15.00% EBIT/Sales 15.00% EBIT/Sales 15.00% EBIT/Sales 15.00% EBIT/Sales 15.00% Sales/Assets 2.00 Sales/Assets 1.00 Sales/Assets 2.00 Sales/Assets 2.00 Sales/Assets 2.00 Sales/Assets 2.00 Assets/Equity 2.00 Assets/Equity 2.00 Assets/Equity 1.00 Assets/Equity 2.00 Assets/Equity 2.00 Assets/Equity 2.00 Dividend Payout Ratio 10.00% Dividend Payout Ratio 10.00% Dividend Payout Ratio 10.00% Dividend Payout Ratio 5.00% Dividend Payout Ratio 10.00% Dividend Payout Ratio 10.00% Interest Rate 10.00% Interest Rate 10.00% Interest Rate 10.00% Interest Rate 10.00% Interest Rate 5.00% Interest Rate 10.00% Tax Rate 40.00% Tax Rate 40.00% Tax Rate 40.00% Tax Rate 40.00% Tax Rate 40.00% Tax Rate 20.00% EBIT per Dollar of Sales 0.075 EBIT per Dollar of Sales 0.150 EBIT per Dollar of Sales 0.150 EBIT per Dollar of Sales 0.150 EBIT per Dollar of Sales 0.150 EBIT per Dollar of Sales 0.150 Assets per Dollar of Sales 0.500 Assets per Dollar of Sales 1.000 Assets per Dollar of Sales 0.500 Assets per Dollar of Sales 0.500 Assets per Dollar of Sales 0.500 Assets per Dollar of Sales 0.500 Equity per Dollar of Sales 0.250 Equity per Dollar of Sales 0.500 Equity per Dollar of Sales 0.500 Equity per Dollar of Sales 0.250 Equity per Dollar of Sales 0.250 Equity per Dollar of Sales 0.250 Sustainable Growth Rate 10.80% Sustainable Growth Rate 10.80% Sustainable Growth Rate 16.20% Sustainable Growth Rate 28.50% Sustainable Growth Rate 29.70% Sustainable Growth Rate 36.00% c. How does g* change in response to increases by half in the variables? Assumptions Assumptions Assumptions Assumptions Assumptions Assumptions EBIT/Sales 22.50% EBIT/Sales 15.00% EBIT/Sales 15.00% EBIT/Sales 15.00% EBIT/Sales 15.00% EBIT/Sales 15.00% Sales/Assets 2.00 Sales/Assets 3.00 Sales/Assets 2.00 Sales/Assets 2.00 Sales/Assets 2.00 Sales/Assets 2.00 Assets/Equity 2.00 Assets/Equity 2.00 Assets/Equity 3.00 Assets/Equity 2.00 Assets/Equity 2.00 Assets/Equity 2.00 Dividend Payout Ratio 10.00% Dividend Payout Ratio 10.00% Dividend Payout Ratio 10.00% Dividend Payout Ratio 15.00% Dividend Payout Ratio 10.00% Dividend Payout Ratio 10.00% Interest Rate 10.00% Interest Rate 10.00% Interest Rate 10.00% Interest Rate 10.00% Interest Rate 15.00% Interest Rate 10.00% Tax Rate 40.00% Tax Rate 40.00% Tax Rate 40.00% Tax Rate 40.00% Tax Rate 40.00% Tax Rate 60.00% EBIT per Dollar of Sales 0.225
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Chapter 8 Solutions - 8 1 Using the template below a The...

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