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Crum expects sales to grow by 25 percent in 2007 and operating costs should increase in proportion to sales.

You have been given the attached information on the Crum Company. Crum expects sales to grow by 25 percent in 2007 and operating costs should increase in proportion to sales.  Fixed assets were being operated at 70 percent of capacity in 2006, but all other assets were used to full capacity.  Underutilized fixed assets cannot be sold.  Current assets and spontaneous liabilities should increase in proportion to sales during 2007.  The company plans to finance any external funds needed as 35 percent notes payable and 65 percent common stock.  The interest rate is 8 percent and interest expense is based on the debt level at the beginning of the year (cash earns no interest income).  The dividend payout ratio will remain constant, irrespective of how many shares of stock are outstanding.  What is Crum's projected ROE?  (Ignore any financing feedback effects).
Information on the Crum Company (dollars in thousands):
                     2006          2007 Forecast     2007 After AFN
Sales               1200.00
Operating Costs      975.00
EBIT                 225.00
Interest              18.00
EBT                  207.00
Taxes (35%)           72.00
Net Income           135.00
Dividends (60%)       81.00
Add'n to R.E.         54.00
Current Assets       700.00
Net fixed assets     300.00
Total Assets        1000.00
A/P and Accruals     125.00
N/P                  225.00
Common stock         150.00
Retained earnings    500.00
Total Liab & Equity 1000.00

This question was asked on May 11, 2010.

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