Better Burgers reported the following numbers (in millions) for the years ending

Question

Better Burgers reported the following numbers (in millions) for the years ending February 2011 and 2012. 2011 2012 Net income $ 1,417 Dividends 205 Total assets $ 13,580 12,768 Total equity 6,211 4,494 Requirement 1: What are the internal and sustainable growth rates? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16).) Internal growth rate % Sustainable growth rate % Requirement 2: What are the internal and sustainable growth rates using ROE × b and (ROA × b) and the end of period equity (assets)? (Enter rounded answers as directed, but do not use the rounded numbers in intermediate calculations. Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16).) Internal growth rate % Sustainable growth rate % Requirement 3: What are the growth rates if you use the beginning of period equity in this equation? (Enter rounded answers as directed, but do not use the rounded numbers in intermediate calculations. Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16).) Internal growth rate % Sustainable growth rate %

Explanation / Answer

Req. 1=

ROA = 1417 / 12768 = 11.10%

Retention Ratio = (1417 - 205) / 1417 = 85.5%

Internal Growth rate = ROA * Retention ratio / 1 - (ROA * Retention ratio)

= 0.111 * 0.855 / 1 - (0.111 * 0.855) = 10.49%

Sustainable growth rate = ROA * Retention Ratio = 0.111 * 0.855 = 9.49%

Req. 2=

Return On Equity (ROE) = 1417 / 4494 = 31.53%

Retention Ratio = (1417 - 205) / 1417 = 85.5%

Internal Growth rate based on ROE = ROE * Retention ratio / 1 - (ROE * Retention ratio)

= 0.3153 * 0.855 / 1 - (0.3153 * 0.855) = 36.93%

Sustainable growth rate based on ROE = ROE * Retention Ratio = 0.3153 * 0.855 = 26.96%

Req.3 = if we use the beginning of period equity,

Return On Equity (ROE) = 1417 / 6211 = 22.81%

Retention Ratio = (1417 - 205) / 1417 = 85.5%

Internal Growth rate based on ROE   = ROE * Retention ratio / 1 - (ROE * Retention ratio)

= 0.2281 * 0.855 / 1 - (0.2281 * 0.855) = 24.22%

Sustainable growth rate based on ROE = ROE * Retention Ratio = 0.2281 * 0.855 = 19.50%

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.