rcadia Enterprises would like to grow 10% per year for the foreseeable future. T
ID: 2733923 • Letter: R
Question
rcadia Enterprises would like to grow 10% per year for the foreseeable future. The firm’s financial statements are provided below (in $000’s).
Income Statement
Sales
1400
Cost of Sales
700
Depreciation
200
Interest
150
Taxes (34%)
119
Net Income
231
Dividends
169
Total 2969
Balance Sheet
Current Assets
1891 Current Liabilities
1173
Net Fixed Assets
1689 Long Term Debt
945
Common Stock
959
Retained Earnings
503
Total 3580 3580
Required:
(a) Calculate the internal and sustainable growth rates for Arcadia?
(b) Why is there a difference in the internal and sustainable growth rates? (Do not just repeat the formulas. Tell me why one has a higher growth than the other.I.e. What is making the firm able to grow in the case of the higher growth rate?)
(c) What dividend payout ratio should Arcadia adopt to achieve its 10% growth objective?
Income Statement
Sales
1400
Cost of Sales
700
Depreciation
200
Interest
150
Taxes (34%)
119
Net Income
231
Dividends
169
Explanation / Answer
a. Internal growth rate = Retain earnings / total asset = 503/ 3580 = 0.140503=14%
Sustainable growth rate = sales / total asset = 1400/3580 = 0.391061 = 39%
b. The internal growth rate is a formula for calculating the maximum growth rate a firm can achieve without resorting to external financing where as Sustainable growth is defined as the annual percentage of increase in sales that is consistent with a defined financial policy.
c. IF the divident pay out ratio is 20% then arcadia will achieve its 10% growth.
If any firm is having high growth rate means it is earning good retuns and those return they will utilise to expand their business and sales.
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