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Sustainable Growth

17. Sustainable Growth. Plank`s Plants had net income of $2,000 on sales of $40,000 last year. The firm paid a dividend of $500. Total assets were $100,000, of which $40,000 was financed by debt.

a. What is the firm`s sustainable growth rate?

b. If the firm grows at its sustainable growth rate, how much debt will be issued next year?

c. What would be the maximum possible growth rate if the firm did not issue any debt next year?

18. Sustainable Growth. A firm has decided that its optimal capital structure is 100 percent equity financed. It perceives its optimal dividend policy to be a 40 percent payout ratio. Asset turnover is sales/assets = .8, the profit margin is 10 percent, and the firm has a target growth rate of 5 percent.

a. Is the firm`s target growth rate consistent with its other goals?

b. If not, by how much does it need to increase asset turnover to achieve its goals?

c. How much would it need to increase the profit margin instead?

19. Internal Growth. Go Go Industries is growing at 30 percent per year. It is all-equity financed and has total assets of $1 million. Its return on equity is 20 percent. Its plowback ratio is 40 percent.

a. What is the internal growth rate?

b. What is the firm`s need for external financing this year?

c. By how much would the firm increase its internal growth rate if it reduced its payout ratio to zero?

d. By how much would such a move reduce the need for external financing? What do you conclude about the relationship between dividend policy and requirements for external financing?

20. Sustainable Growth. A firm`s profit margin is 10 percent and its asset turnover ratio is .5. It has no debt, has net income of $10 per share, and pays dividends of $4 per share. What is the sustainable growth rate?

21. Internal Growth. An all-equity financed firm plans to grow at an annual rate of at least 10 percent. Its return on equity is 15 percent. What is the maximum possible dividend payout rate the firm can maintain without resorting to additional equity issues?

22. Internal Growth. Suppose the firm in the previous question has a debt-equity ratio of 1/3. What is the maximum dividend payout ratio it can maintain without resorting to any external financing?

23. Internal Growth. A firm has an asset turnover ratio of 2.0. Its plowback ratio is 50 percent, and it is all-equity financed. What must its profit margin be if it wishes to finance 8 percent growth using only internally generated funds?

24. Internal Growth. If the profit margin of the firm in the previous problem is 6 percent, what is the maximum payout ratio that will allow it to grow at 8 percent without resorting to external financing?

25. Internal Growth. If the profit margin of the firm in problem 23 is 6 percent, what is the maximum possible growth rate that can be sustained without external financing?

26. Using Percentage of Sales. The 2000 financial statements for Growth Industries are presented below. Sales and costs in 2001 are projected to be 20 percent higher than in 2000. Both current assets and accounts payable are projected to rise in proportion to sales. The firm is currently operating at full capacity, so it plans to increase fixed assets in proportion to sales. What external financing will be required by the firm? Interest expense in 2001 will equal 10 percent of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of .40.

27. Capacity Use and External Financing. Now suppose that the fixed assets of Growth Industries (from the previous problem) are operating at only 75 percent of capacity. What is required external financing over the next year?

28. Capacity Use and External Financing. If Growth Industries from problem 26 is operating at only 75 percent of capacity, how much can sales grow before the firm will need to raise any external funds? Assume that once fixed assets are operating at capacity, they will need to grow thereafter in direct proportion to sales.

29. Internal Growth. For many firms, cash and inventory needs may grow less than proportionally with sales. When we recognize this fact, will the firm`s internal growth rate be higher or lower than the level predicted by the formula Internal growth rate = retained earnings assets

30. Spreadsheet Problem. Use a spreadsheet like that in Figure 1.17 to answer the following questions about Executive Fruit: a. What would be required external financing if the growth rate is 15 percent and the dividend payout ratio is 60 percent?

b. Given the assumptions in part (a), what would be the amount of debt and equity issued if the firm wants to maintain its debt-equity ratio at a level of 2/3?

c. What formulas would you put in cells C23 and C24 of the spreadsheet in Figure 1.17 to maintain the debt-equity ratio at 2/3, while forcing the balance sheet to balance (that is, forcing debt + equity = total assets)?