360 35 460 $ 880 Major Manuscripts, Inc. 2012 Balance Sheet 4,100 5,630 3,930 $

Question

360  

35  

460  

$

880  

  

Major Manuscripts, Inc.
2012 Balance Sheet

4,100    

5,630    

3,930    

$

11,360    

$

11,360    

   
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 $ 9,200     Cost of goods sold 7,465     Depreciation

360  

  Earnings before interest and taxes $ 1,375     Interest paid

35  

  Taxable Income $ 1,340     Taxes

460  

  Net income

$

880  

     Dividends $ 220  

Explanation / Answer

Retained Earning of this year = 880-220 = 660

Equity at Begnning of Year = 2700 + 5630 - 660 = $7670

ROE = 880/7670 = 11.47%

Retention Ratio = 660/880 = 75%

Growth Rate = 11.47*75% = 8.60%

8.60 percent

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