Plank’s Plants had net income of $4,000 on sales of $90,000 last year. The firm
ID: 3010803 • Letter: P
Question
Plank’s Plants had net income of $4,000 on sales of $90,000 last year. The firm paid a dividend of $400. Total assets were $300,000, of which $180,000 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 $4,000 on sales of $90,000 last year. The firm paid a dividend of $400. Total assets were $300,000, of which $180,000 was financed by debt.
Explanation / Answer
a) here, net income=4000, debt =1,80000 dividend =400
g = plowback ratio * ROE
Plowback ratio= net income - dividend /net income
ROE = net income/ debt
g =( 4,000 -400 /4000) **( 4000/ 180000) = 0.02 = 2%
Sustainable growth rate = 2%
b) here assets =300000
g = 2%, assets will grow by 2% × $300,000 = $6000. If the debt-equity ratio is constant, then debt must grow by 0.50 × $6000 = $3000. Thus, the firm will issue $3000 in next year