MC Qu. 60 Major Manuscripts, Inc. does not want to incur any additional ... Majo
ID: 2383624 • Letter: M
Question
MC Qu. 60 Major Manuscripts, Inc. does not want to incur any additional ...
Major Manuscripts, Inc.
2009 Income Statement
Net sales
$7,600
Cost of goods sold
6,665
Depreciation
200
Earnings before interest and taxes
$ 735
Interest paid
22
Taxable Income
$ 713
Taxes
249
Net income
$ 465
Dividends
$ 209
Major Manuscripts, Inc.
2009 Balance Sheet
2009
2009
Cash
$2,200
Accounts payable
$1,650
Accounts rec.
840
Long-term debt
290
Inventory
2,300
Common stock
$2,500
Total
$5,340
Retained earnings
3,950
Net fixed assets
3,050
Total assets
$8,390
Total liabilities & equity
$8,390
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?
11.11 percent
3.17 percent
3.14 percent
2.56 percent
4.13 percent
I know formula is ROA * b / 1-ROA * b but keep getting something close to 11.11 percent but that is wrong.
I have 5.54% * 55.05% / 1-5.54% * 55.05% = 1.0032897
What am I doing wrong?
Major Manuscripts, Inc.
2009 Income Statement
Explanation / Answer
Dividend payout ratio = 209 /465
= 44.95%
so retention ratio = 100 - 44.95 = 55.05%
Return on asset = 465 /8390
= .0554 or 5.54%
so growth = (.0554 * .5505 ) / [1- (.0554 *.5505 )]
= .03050 / [ 1- .0305]
= .03050 / .9695
= .0314 or 3.14%
correct option is "C"
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