Sustainable growth rate ROE b Sustainable growth rate 1254 8684 Sustainable

# Sustainable growth rate roe b sustainable growth rate

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Sustainable growth rate = ROE × b Sustainable growth rate = .1254 × .8684 Sustainable growth rate = .1089 or 10.89% Using the end of period ROE in the shortened sustainable growth rate results in a growth rate that is too low. This will always occur whenever the equity increases. If equity increases, the ROE based on end of period equity is lower than the ROE based on the beginning of period equity. The ROE (and sustainable growth rate) in the abbreviated equation is based on equity that did not exist when the net income was earned. 24. The ROA using end of period assets is: ROA = \$19,000 / \$250,000 ROA = .0760 or 7.60% The beginning of period assets had to have been the ending assets minus the addition to retained earnings, so: Beginning assets = Ending assets – Addition to retained earnings Beginning assets = \$250,000 – 16,500 Beginning assets = \$233,500 And the ROA using beginning of period assets is: ROA = \$19,000 / \$233,500 ROA = .0814 or 8.14% Using the internal growth rate equation presented in the text, we get: Internal growth rate = (ROA × b) / [1 – (ROA × b)] Internal growth rate = [.0814(.8684)] / [1 – .0814(.8684)] Internal growth rate = .0707 or 7.07% Using the formula ROA × b, and end of period assets: Internal growth rate = .0760 × .8684 Internal growth rate = .0660 or 6.60% Using the formula ROA × b, and beginning of period assets: Internal growth rate = .0814 × .8684 Internal growth rate = .0707 or 7.07% 25. Assuming costs vary with sales and a 20 percent increase in sales, the pro forma income statement will look like this: MOOSE TOURS INC. Pro Forma Income Statement Sales \$ 1,114,800 Costs 867,600 Other expenses 22,800 EBIT \$ 224,400 Interest 14,000 Taxable income \$ 210,400 Taxes(35%) 73,640 Net income \$ 136,760 The payout ratio is constant, so the dividends paid this year is the payout ratio from last year times net income, or: Dividends = (\$33,735/\$112,450)(\$136,760) Dividends = \$41,028 And the addition to retained earnings will be: Addition to retained earnings = \$136,760 – 41,028 Addition to retained earnings = \$95,732 The new retained earnings on the pro forma balance sheet will be: New retained earnings = \$182,900 + 95,732 New retained earnings = \$278,632 The pro forma balance sheet will look like this: MOOSE TOURS INC. Pro Forma Balance Sheet Assets Liabilities and Owners’ Equity Current assets Current liabilities Cash \$ 30,360 Accounts payable \$ 81,600 Accounts receivable 48,840 Notes payable 17,000 Inventory 104,280 Total \$ 98,600 Total \$ 183,480 Long-term debt 158,000 Fixed assets Net plant and Owners’ equity equipment 495,600 Common stock and paid-in surplus \$ 140,000 Retained earnings 278,632 Total \$ 418,632 Total liabilities and owners’ Total assets \$ 679,080 equity \$ 675,232 So the EFN is: EFN = Total assets – Total liabilities and equity EFN = \$679,080 – 675,232 EFN = \$3,848 26. First, we need to calculate full capacity sales, which is: Full capacity sales = \$929,000 / .80 Full capacity sales = \$1,161,250 The capital intensity ratio at full capacity sales is: Capital intensity ratio = Fixed assets / Full capacity sales Capital intensity ratio = \$413,000 / \$1,161,250 Capital intensity ratio = .35565 The fixed assets required at full capacity sales is the capital intensity ratio times the projected sales level: Total fixed assets = .35565(\$1,161,250) = \$396,480 So, EFN is: EFN = (\$183,480 + 396,480) – \$613,806 = –\$95,272 Note that this solution assumes that fixed assets are decreased (sold) so the company has a 100 percent fixed asset utilization. If we assume fixed assets are not sold, the answer  #### You've reached the end of your free preview.

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