Problem 3-42 Sustainable Growth and Outside Financing [LO 3] You’ve collected th
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Problem 3-42 Sustainable Growth and Outside Financing [LO 3] You’ve collected the following information about Fox, Inc.: Sales = $ 260,000 Net income = $ 17,300 Dividends = $ 6,100 Total debt = $ 56,000 Total equity = $ 87,000 Requirement 1: What is the sustainable growth rate for the company? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Sustainable growth rate % Requirement 2: Assuming it grows at this rate, how much new borrowing will take place in the coming year, assuming a constant debt-equity ratio? (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).) Additional borrowing $ Requirement 3: What growth rate could be supported with no outside financing at all? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Internal growth rate %Explanation / Answer
Details Amt$ /Ratio Total Debt 56,000 Total Equity 87,000 Total Asset 143,000 Net Income 17,300 Return on Assets =ROA = 12.10% Return on Equity =ROE= 19.89% Dividend paid 6,100 Retention 11,200 Retention Rate =RR= 64.74% 1 Sustainable Growth rate =(ROE.RR)/(1-ROE.RR)= 14.78% 2 At 14.78 % groeth , net income = 19,857 Retention amount = 12,855 Total Asset (assuming same growth rate )= 164,135 Less Equity =(87000+12855)= 99,855 Required debt 64,280 Existing debt 56,000 Additional debt required = 8,280 3 growth without extenal financing =Internal Growth rate =(ROA.RR)/(1-ROA.RR)= 8.50% So internal growth rate =8.5%
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