Plank’s Plants had net income of $7,000 on sales of $50,000 last year. The firm
ID: 2738093 • Letter: P
Question
Plank’s Plants had net income of $7,000 on sales of $50,000 last year. The firm paid a dividend of $1,960. Total assets were $300,000, of which $120,000 was financed by debt. a. What is the firm’s sustainable growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) Sustainable growth rate % b. If the firm grows at its sustainable growth rate, how much debt will be issued next year? (Do not round intermediate calculations.) New debt $ c. What would be the maximum possible growth rate if the firm did not issue any debt next year? (Do not round intermediate calculations.
Explanation / Answer
a. sustainable growth rate = ROE x (1 - dividend-payout ratio)
Equity = 300,000-120,000 = 180,000
ROE = 7000/180,000= 3.88%
sustainable growth rate= 3.88%*(1-1960/7000) = 2.79%
b.New debt = 2.79%*180000 = $5029.
c. maximum growth rate = 2.79%*180000/300000 =0.01674 or 1.674%.