MC Qu. 4-A8 Major Manuscripts, Inc. does not want to incur any additional... Maj

Question

MC Qu. 4-A8 Major Manuscripts, Inc. does not want to incur any additional... Major Manuscripts, Inc. 2012 Income Statement Net sales Cost of goods sold Depreciation Earnings before interest and1,465 9,400 7,565 370 axes Interest paid Taxable Income Taxes Net income 40 1.425 485 940 258 Dividends Major Manuscripts, Inc 2012 Balance Sheet 2012 2012 Cash Accounts rec. Inventory Total $2,320 1,010 4,200 $ 7,530 4,080 11,610 Accounts payable$2,630 Long-term debt Common stock 2,800 Retained earnings 280 5,900 Total assets Total liabilities& 11,610 equity Major Manuscripts, Inc.,.does not want to incur any additional external financing. The dividend payout ratio is constant. What is the firm's maximum rate of growth?

Explanation / Answer

ROE = Net income / Equity = 940/(2800+5900) = 940/8700
Dividend Payout Ratio = Dividend / Net Income = 258/940 =
ROE = growth * (1- Dividend Payout Ratio)
Growth = ROE/(1- Dividend Payout Ratio ) = (940/8700)/(1- 258/940) = 14.89%

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