Goals for Sales and Income Growth Sunrise Corp. is a major regional retailer. Th
ID: 2794296 • Letter: G
Question
Goals for Sales and Income Growth
Sunrise Corp. is a major regional retailer. The chief executive officer (CEO) is concerned with the slow growth both of sales and of net income and the subsequent effect on the trading price of the common stock. Selected financial data for the past three years follow.
*Based on year-end balances in owners’ equity.
The CEO believes that the price of the stock has been adversely affected by the downward trend of the return on equity, the relatively low dividend payout ratio, and the lack of dividend increases. To improve the price of the stock, she wants to improve the return on equity and dividends.
She believes that the company should be able to meet these objectives by (1) increasing sales and net income at an annual rate of 10% a year and (2) establishing a new dividend policy that calls for a dividend payout of 50% of earnings or $3,000,000, whichever is larger.
The 10% annual sales increase will be accomplished through a new promotional program. The president believes that the present net income to sales ratio of 3% will be unchanged by the cost of this new program and any interest paid on new debt. She expects that the company can accomplish this sales and income growth while maintaining the current relationship of total assets to sales. Any capital that is needed to maintain this relationship and that is not generated internally would be acquired through long-term debt financing. The CEO hopes that debt would not exceed 35% of total liabilities and owners' equity.
Required:
1. Using the CEO's program, prepare a schedule that shows the appropriate data for the years 2017, 2018, and 2019 for the items numbered 1 through 7 on the preceding schedule.
Enter dollar amounts in millions rounded to three decimal places when applicable, such as 250.354.
To enter ratios, round your answer to three decimal places before converting to a percentage and enter your percentage answer rounded to one decimal place. For example, .88391 would be rounded to .884 and entered as 88.4.
Enter all amounts as positive numbers.
2. Can the CEO meet all of her requirements if a 10% per-year growth in income and sales is achieved? Explain your answer.
3. The CEO can improve the return on equity by doing
all of these.
reduce costs to improve profit margins.
focus on more profitable product lines.
increase total asset turnover.
4. What reason(s) might prevent the CEO from raising the debt-equity ratio to a very high level?
Resulting higher cost of debt due to increased risk and a potential drop in stock price.
Potential increase in cost of goods sold.
All of these.
Reduction in total asset turnover ratio.
Sunrise Corp. (in millions) 2016 2015 2014 1. Sales $200.0 $192.5 $187.0 2. Net income 6.0 5.8 5.6 3. Dividends declared and paid 2.5 2.5 2.5 December 31 balances: 4. Owners’ equity 70.0 66.5 63.2 5. Debt 30.0 29.8 30.3 Selected year-end financial ratios Net income to sales 3.0% 3.0% 3.0% Asset turnover 2 times 2 times 2 times 6. Return on owners’ equity* 8.6% 8.7% 8.9% 7. Debt to total assets 30.0% 30.9% 32.4%Explanation / Answer
Ans1
Ans2. It is very difficult to continuesly have the level expected with the amoutn of growth the company is having. There are two things the company wants a consistent doule digest growth in profits and sales, and a double turnover ratio, bith leading to company being very aggresive in its profits.To be that much aggresive with assets churning double the rate we would require a lot of money, and that can only come if we buy back shares for capital or increase debt. This will increase the pressure and indirectly will also reduce the liquidity of the shares in the market. The idea of higher profit will only start reducing the profit as the debt level will start increasing. It is also one of the reason that the debt level when beyond the comfort level for the company.
Ans 3. As per the first two option to increase the profit margins or work on a line to increase the profie will have one main factor which is debt, and the dividend been paid, if 30% of the amount is paid to the dividend. The amount of debt to fuel the growth will be the issue.
Although the second option has more upward potential toprovide the growth which can really sustain the level of debt we would be having.
The total asset turnover can happen if the sales boost or the level of debt decrease. To keep it consistent it will again depend on the two factors mentioned above. Either the cost would reduce or the company works on to boost the pipeline of the profit generating part so that it can start to fuel the growth for the company.
Ans 4 The cost of debt if start to increase it will eat up the stock price, as fundamentally stock price is the value of the future cashflow in present time, and that depends on the cashflow and the discounting factor,The discounting factor being weighted average cost of capital will have hige debt level then it will impact the cashflow. Also, even though company will pay dividend but it will be very short term advantage for the company.. The debt will start eating up the profit of the company and slowly the margin will reduce, and at the end it will also impact the share holders return whcih is the ROE. The per share values may also drop,and the company would be foreced to contract back to have a control on the cost or would have to take the risk to expand with the bullish outlook.
2017 2018 2019 Sales 220 242 266.2 Net Income 6.6 7.26 7.986 Dividend Declared and paid 3.30 3.63 3.993 December 31 Balances Owner's Equity 73.30 76.93 80.92 Debt 36.5 44 52 Selected Year end financial ratio net income to sales 3.00% 3.00% 3.00% asset turnover 2.00 2.00 2.00 Return on owner's equity 9.00% 9.44% 9.87% Debt to tatal assets 33.33% 36.38% 39.12%Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.