260 50 332 $ 643 Major Manuscripts, Inc. 2012 Balance Sheet 3,100 4,800 3,530 $

Question

260

50

332

$

643

Major Manuscripts, Inc.
2012 Balance Sheet

3,100    

4,800    

3,530    

$

9,740    

$

9,740    

1) Major Manuscripts, Inc., does not want to incur any additional external financing. The dividend payout ratio is constant. What is the firm's maximum rate of growth?

2) If Major Manuscripts, Inc., decides to maintain a constant debt-equity ratio, what rate of growth can it maintain assuming that no additional external equity financing is available?

Major Manuscripts, Inc.
2012 Income Statement   Net sales $ 8,300   Cost of goods sold 7,015   Depreciation

260

  Earnings before interest and taxes $ 1,025   Interest paid

50

  Taxable Income $ 975   Taxes

332

  Net income

$

643

     Dividends $ 236

Explanation / Answer

1) Payout Ratio = 236/643 = 0.3670

Retention Ratio = 1-0.3670 = 0.6330

ROE = 643/(3300+4800) =7.938%

Firm's Maximum growth Rate = 0.6330*7.938 = 5.025%

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