Plank’s Plants had net income of $6,000 on sales of $90,000 last year. The firm
ID: 2772821 • Letter: P
Question
Plank’s Plants had net income of $6,000 on sales of $90,000 last year. The firm paid a dividend of $2,100. Total assets were $500,000, of which $350,000 was financed by debt.
What is the firm’s sustainable growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)
If the firm grows at its sustainable growth rate, how much debt will be issued next year? (Do not round intermediate calculations.)
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.)
Plank’s Plants had net income of $6,000 on sales of $90,000 last year. The firm paid a dividend of $2,100. Total assets were $500,000, of which $350,000 was financed by debt.
Explanation / Answer
Answer :- Net income = 6000
Sales = 90000
Assets = 500000
Debt = 350000
Equity = 500000 - 350000
= 150000
a.) Suitable growth rate = ( 1 - D/P ratio ) * Return on Equity(ROE)
ROE = 6000 / 150000
= .04
D/P Ratio = 6000 / 90000
= .067
Suitable growth rate = ( 1 - .067 ) * .04
= .037
= 3.7%
b.) If Growth Rate = 3.7%
Then Assets grow by = 500000 * 3.7%
= 18500
If Debt-Equity Ratio is constant, then Debt grow by = ( 350000 / 500000) * 18500
= 12950
and Equity grow by = ( 150000 / 500000) * 18500
= 5550
The Firm will issue $ 12950 new Debt.
c.) Maximum Possible Growth Rate if the Firm did not issue any Debt next year
Maximim Growth Rate = ( 1 - D/P Ratio ) * ROE * ( Equity / Assets )
= ( 1 - .067 ) * .04 * ( 150000 / 500000 )
= .011
= 1.1%