To calculate: The sustainable growth rate, the number of additional borrowings, and the growth rate without any outside financing.
Introduction:
The rate of sustainable growth is the highest growth rate which can be achieved without the external equity financing.
Answer
The sustainable growth rate and the additional borrowing of Company E are 13.61% and $9,117.35 respectively. The internal growth rate is 7.41%.
Explanation of Solution
Given information:
The sales of Company E are $275,000, net income is $19,000, dividends are $8,100, total debt is $67,000, and the total equity is $91,000.
Formula to compute the retention ratio:
Compute the retention ratio:
Hence, the retention ratio is 0.5737.
Formula of DuPont identity to compute ROE (
Compute ROE (Return on equity):
Hence, the ROE is 20.88%.
Formula to calculate the sustainable growth rate:
Where,
ROE denotes the return on equity.
b denotes the retention or plowback ratio.
Compute the maximum sustainable growth rate:
Hence, the sustainable growth rate is 0.1361 or 13.61%.
Formula to compute the net total assets:
Compute the net total assets
Hence, the new total assets are $179,500.62.
Formula to compute the net total debt:
Compute the net total debt:
Hence, the new total debt is $76,117.35.
Formula to compute the additional borrowings:
Compute the additional borrowings:
Hence, the additional borrowing is $9,117.35.
Formula to compute the ROA (Return on assets):
Compute the ROA (Return on assets):
Hence, the ROA is 12.03%.
Formula to compute the internal growth rate:
Where,
ROA denotes the return on assets.
b denotes the retention or plowback ratio.
Calculate the internal growth rate:
Hence, the internal growth rate is 7.41%.
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Chapter 3 Solutions
Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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