Tasty Ice Cream has a capital intensity ratio of 125 at full capacity Currently

# Tasty ice cream has a capital intensity ratio of 125

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50. Tasty Ice Cream has a capital intensity ratio of 1.25 at full capacity. Currently, total assets are \$1,900 and current sales are \$1,400. At what level of capacity is the firm currently operating? a. 64 percentb. 74 percentc. 80 percentD. 92 percente. 100 percentTotal capacity sales = \$1,900 / 1.25 = \$1,520; Current capacity utilization = \$1,400 / \$1,520 = .921 = 92 percentAACSB TOPIC: ANALYTICSECTION: 4.3TOPIC: CAPACITY USAGE AND CAPITAL INTENSITY RATIOTYPE: PROBLEMS51. Gerald's Manufacturing is operating at 78 percent of its fixed asset capacity and has current sales of \$575,000. How fast can the firm grow before any new fixed assets are needed? Full-capacity sales = \$575,000 / .78 = \$737,179.49; Maximum growth without additional assets = (\$737,179.49 / \$575,000) 1 = .28205 = 28.21 percentAACSB TOPIC: ANALYTICSECTION: 4.3TOPIC: FULL CAPACITY SALES AND FIXED ASSETSTYPE: PROBLEMS 52. The General Store has a 3 percent profit margin and a 20 percent dividend payout ratio. The total asset turnover is 1.80 and the debt-equity ratio is .40. What is the sustainable rate of growth? Equity multiplier = 1 + .40 = 1.4; Return on equity = .03 1.80 1.40 = .0756; Sustainable growth = {.0756 (1 .20)} / {1 [.0756 (1 .20)]} = .06437= 6.44 percentAACSB TOPIC: ANALYTICSECTION: 4.4TOPIC: SUSTAINABLE GROWTH AND DU PONT IDENTITYTYPE: PROBLEMS53. Your company wants a sustainable growth rate of 3.45 percent while maintaining a 30 percent dividend payout ratio and a 7 percent profit margin. The company has a capital intensity ratio of 1.5. What is the equity multiplier that is required to achieve the company's desired rate of growth? .0345 = {ROE (1 .3)} / {1 [ROE (1 .3)]}; ROE = .047642; .047642 = .07 (1 / 1.5) EM; EM = 1.02AACSB TOPIC: ANALYTICSECTION: 4.4TOPIC: SUSTAINABLE GROWTH AND EQUITY MULTIPLIERTYPE: PROBLEMS 54. A firm has a payout ratio of 40 percent and a sustainable growth rate of 8.5 percent. The capital intensity ratio is 1.1 and the debt-equity ratio is .5. What is the profit margin? a. 5.4 percentb. 7.9 percentC. 9.6 percentd. 11.9 percente. 14.4 percent.085 = [.6 ROE] / [1 (.6 ROE)]; ROE = .13057; .13057 = PM (1 / 1.1) (1 + .5); PM = 9.6 percentAACSB TOPIC: ANALYTICSECTION: 4.3 AND 4.4TOPIC: SUSTAINABLE GROWTH AND PROFIT MARGINTYPE: PROBLEMS55. Decorative Interiors wants to maintain a growth rate of 7 percent without incurring any additional equity financing. The firm maintains a constant debt-equity ratio of .6, a total asset turnover ratio of .75, and a profit margin of 6 percent. What must the dividend payout ratio be? Return on equity = .06 .75 (1 + .60) = .072; Sustainable growth = [.072 b] / [1 (.072 b)] = .9086; Payout ratio = 1 .9086 = .0914 = 9.1 percentAACSB TOPIC: ANALYTICSECTION: 4.3 AND 4.4TOPIC: SUSTAINABLE GROWTH AND PAYOUT RATIOTYPE: PROBLEMS  #### You've reached the end of your free preview.

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