Sales $200,000 Debt 95,000 Dividends 5,000 Equity 40,000 Interest Rate 7% Net in
ID: 2779356 • Letter: S
Question
Sales $200,000
Debt 95,000
Dividends 5,000
Equity 40,000
Interest Rate 7%
Net income 16,000
Tax Rate 30%
What is the company’s EBIT?
What is the Company's ROIC?
What is the company's basic earning power?
What is the company's equity multiplier?
What is the company's sustainable growth rate assuming that debt rations do not change?
How much additional debt will the company require to keep the current debtequity ratio constant if the company were to grow at the sustainable growth rate?
At what growth rate could the Lowell Inc. grow if it did not wish to increase the amount of debt?
Assume the company has no short term debt, all asset turnover, profit margin, dividend payout ratios remain constant
Explanation / Answer
Company’s EBIT:
= Net income+Tax expense+Interest on debt
= $16,000+$16,000×30%÷70%+$95,000×7%
= $29,507
Company ROIC:
= (Net income-Dividends)÷(Debt+Equity)
= ($16,000-$5,000)÷($95,000+$40,000)
= 8.15%
Basic earnings power:
= EBIT÷Total assets
= $29,507÷($95,000+$40,000)
= 21.86%
Equity multiplier:
= Total assets÷Equity
= ($95,000+$40,000)÷$40,000
= 3.375
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