I think I have the answers for these but just want to double check to make sure
ID: 2683125 • Letter: I
Question
I think I have the answers for these but just want to double check to make sure I don't submit my assignment with errors, thank you so much!1.) Which one of the following correctly defines the retention ratio?
net income minus additions to retained earnings
addition to retained earnings divided by dividends paid
net income minus cash dividends
one plus the dividend payout ratio
addition to retained earnings divided by net income
2.) The sustainable growth rate of a firm is best described as the:
maximum growth rate achievable excluding external financing of any kind.
minimum growth rate achievable if the firm maintains a constant equity multiplier.
minimum growth rate achievable assuming a 100 percent retention ratio.
maximum growth rate achievable with unlimited debt financing.
maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.
3.) The internal growth rate of a firm is best described as the:
minimum growth rate achievable if the firm maintains a constant equity multiplier.
minimum growth rate achievable assuming a 100 percent retention ratio.
maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.
maximum growth rate achievable with unlimited debt financing.
maximum growth rate achievable excluding external financing of any kind.
Explanation / Answer
1. Answer is Option (e)addition to retained earnings divided by net income
Mathematically,
Retention ratio = (Net Income - Dividends to stockholders)/Net Income
Net Income - Dividends to stockholders = Amount added to retained earnings.
This formula signifies the amount of net income that is preserves to be utilized for investment and other corporate purposes. This builds up the common equity of the company.
2) Answer is option (e) maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.
Sustainable growth rate is the maximum rate of growth that a firm can sustain without by accessing even the outside capital like debt, but without changing the capital structure.
Mathematically, SGR = ROE * (Retention ratio)
3. Answer is Option (e) maximum growth rate achievable excluding external financing of any kind.
As the term suggests, internal growth rate is the maximum growth rate that firm can achieve without looking out for external funds.