wishes to maintain a growth rate 12 percent a year a debt equity ratio of 120

# Wishes to maintain a growth rate 12 percent a year a

This preview shows page 9 - 18 out of 21 pages.

equity ratio of 1.20, and a dividend payout ratio of 30 percent. The ratio of total assets to sales is constant at 0.75. What profit margin must the firm achieve? SolutionDuPont Identity: ROE = PM * TA TO * EMPM = ROE / (TA TO * EM)b = RR = 1 - 0.3 = 0.7Given SGR = 0.12(ROE x 0.7) / [1-(ROE x 0.7)] = 0.12ROE = 0.15306 SolutionTA TO = 1/ (total asset to sales) = 1/0.75 = 1.3333EM = 1+ debt-equity ratio = 2.2PM = 0.15306 / (1.3333 x 2.2)= 0.0522 = 5.22% Question 5You’ve collected the following information about St. Pierre, Inc,:Sales\$195,000Net income\$17,500Dividends\$9,300Total debt\$86,000Total equity\$58,000 SolutionWhat is the sustainable growth rate for St. Pierre, Inc.?Dividend payout ratio = 9,300 / 17,500 = 0.53143b = RR = 1 - dividend payout ratio = 0.46857ROE = 17,500 / 58,000 = 0.30172Sustainable Growth Rate = (0.30172 x 0.46857) / [1 - (0.30172 x 0.46857)]= 0.16466 = 16.47% SolutionIf it does grow at this rate, how much new borrowing will take place in the coming year, assuming a constant debt-equity ratio?Old total debt = 86,000New total debt = 86,000 x 116.47% = 100,160.64New borrowing = 100,160.64 - 86,000 = \$14,160.64 SolutionWhat growth rate could be supported with no outside financing at all?Total Assets = Total Debt + Total Equity = 144,000ROA = 17,500 / 144,000 = 0.12153b = 0.46857Internal Growth Rate = (0.12153 x 0.46857) / [1 - (0.12153 x 0.46857)]= 0.060383 = 6.04% Question 6 Solutiona)Assume that all assumptions for application of the AFN Equation hold (as discussed in your course notes, i.e. the firm is operating at full capacity, it maintains the same operating relationships, payout ratios, etc.). What is U-Dunno Corporation’s AFN given a desired increase  #### You've reached the end of your free preview.

Want to read all 21 pages?

• Summer '14
• Star
• Fixed Assets, Generally Accepted Accounting Principles, AFN
• • • 