Plank’s Plants had net income of $9,000 on sales of $80,000 last year. The firm
ID: 2738685 • Letter: P
Question
Plank’s Plants had net income of $9,000 on sales of $80,000 last year. The firm paid a dividend of $1,800. Total assets were $400,000, of which $160,000 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. Enter your answer as a percent rounded to 2 decimal places.)
Maximum growth rate ? %
Explanation / Answer
A)Shareholders equity =Asset -liability
= 400,000 - 160,000
= 240,000
Return on equity = net income /equity
= 9000 / 240,000
= .0375 or 3.75%
Retention ratio = (9000- 1800)/9000 = 7200/9000 = .80 or 80%
Substainable growth = .80 *3.75 = 3%
b) Value of Asset next year = 400,000 *.03 = 12000
debt portion in company (current) = 160000/400000 = .40 or 40%
Debt issue with increase in asset next year = 12000*.40 = 4800
c)If company maintain the same dividend payout ratio as in current year = 1800/9000 = .20 or 20%
Maximum growth rate =Retention ratio * Return on equity* equity /asset
= .80 * 3.75 * (240000/400000)
= .80 *3.75 * .60
= 1.80%