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Homework answers / question archive / AutoSave on H2U v Quiz 4 - Word O Search Issac Arias A ? File Home Insert Draw Design Layout References Mailings Review View Help Share Comments 2
AutoSave on H2U v Quiz 4 - Word O Search Issac Arias A ? File Home Insert Draw Design Layout References Mailings Review View Help Share Comments 2. Percentage of Sales Approach (30 points) The assets and current liabilities of Firm A vary in direct proportion to sales. The cureat sales are $2000 and we can expect them to increase by 20% next year. Net Income is projected to at 5% of sales. The firm is not planning on issuing any more common stock bor paying dividends. Current W of sales Projected 46 Cash Accounts receivable Inventory Fixed assets Total assets 5120 $500 $840 $2,600 96 $1.060 46 Accounts payable $600 Long-term debt_ $700 46 Common stock and surplus $1,000 96 Retained earnings $1.760 46 Total liabilities and equity $4,060 96 hint: I. Find the % of current sales for the items that vary with sales 2. Find the new sales based on growth rate 3. Find the projected sales for items that vary with sales (% of sales tnew sales) 4. Fond debt and exity items . Common stock remains the same • Net Income is added to RE Long-term debt will increase (since no common stock will be issued) by the amount needed to make the balance sheer balance. 3. External Financing and Growth (40 points) a) A firm has net income of S6CXO and total assets of S30,000. The dividend payout ratio is 40%. What is the internal growth rate? b) A firm has a net income of 52000 pays S400 in dividends. Its tolal equity is $3000. What is the sustainable growth rate? Page 2 of 3 338 words X Focus BE Te + 79% Type here to search O W 4 12:18 PM 9/23/2020 21
1. % of sales for cash = Current Cash / Current sales = 120 / 2000 = 6.00% (same approach applicable to all the items)
2. New Sales = Current Sales * (1 + growth rate) = 2000 * 1.20 = $2400
3. Cash projected = New sales * % of cash in sales = 2400 * 6% = $144 (Same approach applicable to all the items)
4. Net Income = new Sales * 5% = $2400 * 5% = $120
5. New Retained earnings = $1760 + 120 = $1880
6. Loan term debt = Total Assets - Accounts payable - Common Stock - retained earnings = $1272
3. Interest Growth rate = (ROA * Retention ratio) / (1 - ROA * Retention ratio)
ROA = Net Income / Assets = $6000 / 30000 = 20%
Retention ratio = 1 - Dividend Payout ratio = 1 - 40% = 60%
Interest Growth rate = (20% * 60%) / (1 - 20%*60%)
Interest Growth rate = 12% / (1 - 12%)
Interest Growth rate = 13.64%
4. Sustainable Growth rate = (ROE * Retention ratio) / (1 - ROE * Retention ratio)
ROE = Net Income / Equity = $2000 / 8000 = 25%
Retention ratio = 1 - Dividend Payout ratio = 1 - 400/2000 = 80%
Sustainable Growth rate = (25% * 80%) / (1 - 25% * 80%)
Sustainable Growth rate = 20% / (1 - 20%)
Sustainable Growth rate = 25%
please see the attached file for the complet solution.
