Problem_Set__3_Solutions - (Post Check)

Problem_Set__3_Solutions - (Post Check) - BusM 401 Problem...

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BusM 401 Problem Set #3 Financial Forecasting/Managing Growth Solutions 1. Do Higgins, Chapter 3, #1. Answer provided in the back of the book. 2. Do Higgins, Chapter 3, #9. Answers provided in the back of the book. 3. Do Higgins, Chapter 4, #1. Answers provided in the back of the book. 4. Do Higgins, Chapter 4, #2. a. 2005 2006 2007 2008 2009F Profit margin (P) (%) 3.3 2.9 2.4 1.4 0.6 Retention ratio(R) (%) 50.0 50.0 50.0 50.0 50.0 Asset turnover (A) (times) 3.4 3.6 3.2 3.5 3.3 Financial leverage ( T ) (times) NA. 3.2 3.6 3.7 4.5 R&E's Sustainable growth rate (g*) (%) --- 16.7 13.8 9.1 4.5 R&E's Actual growth rate (g) (%) --- 23.0 17.0 28.0 25.0 b. R&E's actual growth rate is well in excess of its sustainable growth rate. Its growth management problems clearly involve finding the money to finance growth. c. R&E has coped with its growth problems quite poorly. The profit margin has fallen, contributing to a sizable reduction in sustainable growth. Dividends continue to consume half of earnings, and asset turnover has held constant. The company has essentially financed its rapid growth by increasing financial leverage, first borrowing from suppliers now trying to borrow from the bank. If it doesn't do something quickly, it will hit its debt capacity and could find itself in real trouble.
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d. There are several possibilities. First, I would work hard to get the profit margin back up to a reasonable level. This might involve raising prices. Second, I would prune out all slow moving inventory and slow pay customers. Third, I would cut or eliminate the
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Problem_Set__3_Solutions - (Post Check) - BusM 401 Problem...

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