MacKay Homes has the following current financial results ($000): Revenue $50,000
ID: 2765632 • Letter: M
Question
MacKay Homes has the following current financial results ($000):
Revenue $50,000
Assets $40,000
EAT $ 5,000
Equity $10,000
Dividends $ 2,000
On the average, other building companies pay about one tenth of their earnings in dividends, earn about ten cents on the sales dollar, carry assets worth about three months of sales, and finance one half of their assets with debt.
a) Use the sustainable growth rate concept to analyze MacKay's inherent ability to grow without selling new equity versus that of an average building company.
b)Identify weak areas and suggest further analyses.
gs = (1-d) ROS T/A Equity Turnover Multiplier = (1-d) x EAT/sales sales/assets assets/equity = (1-d)EAT/equity
MacKay ____ = ______ x ________ x ________ x ________
Industry ____ = ______ x ________ x ________ x ________
Explanation / Answer
Sustainable Growth Rate (SGR) for MacKay Homes SGR= ROE*(1-Div.pay-out ratio) 5000/10000*(1-(2000/5000))= 0.3 ie. 30% Expanding the components of ROE, ie. Reurn on Equity, we have, SGR= (1-(2000/5000))*(5000/50000)*(50000/40000)*(40000/10000) 0.3 ie. 30% Sales Suppose 100 EAT 1/10*100 10 Assets 100/12*3 25 Debt 1/2*25 12.5 Equity 1/2*25 12.5 Dividends 1/10*10 1 Calculating Industry Average SGR from the given information, SGR= (1-(1/10))*(10/100)*(100/25)*(25/12.5) 0.72 ie.72% a. SGR= Retention ratio* Return on sales* Asset Turnover ratio * Equity multiplier (1-Div.Pay-out EAT/Sales Sales/Assets Assets/Equity MacKay 30% or 0.3 = 0.6* 0.1* 1.25* 4 Industry 72% or 0.72= 0.9* 0.1* 4* 2 b. Lower asset turnover ratio compared to the Industry average indicates under-utilisatiion of assets to produce sales . Financing of assets seems largely by debt(Assets 40000-Equity10000=Debt30000) than by equity as seen from the high equity multiplier - interest costs may eat into profits. Dividend pay-out is also high compared to the industry average (0.4>0.1)
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