SHOW YOUR CALCULATIONS 1.What was MMI’s after-tax profit margin in 2014? 2.How m
ID: 2774182 • Letter: S
Question
SHOW YOUR CALCULATIONS
1.What was MMI’s after-tax profit margin in 2014?
2.How much in dividends was paid out by MMI in 2014?
3.What was MMI’s dividend payout ratio in 2014?
4.What was MMI’s after-tax return on equity in 2014 (for balance sheet calculations, use the average of the beginning and end-of-year balances)?
5.What was MMI’s after-tax return on assets in 2014 (for balance sheet calculations, use the average of the beginning and end-of-year balances)?
6.Based on your answers above, what is MMI’s sustainable growth rate?
7.Based on your answers above, what is MMI’s internal growth rate?
8.What was MMI’s debt-equity ratio at the end of 2014?
9.Assuming that all sales were on credit, how much did MMI collect from its customers during 2014?
10.If MMI borrowed $750 from its bank at some point during 2014, how much of its debt did it repay during 2014?
11.If you expect MMI’s sales to grow by 5% in 2015 with no change in profit margins or effective tax rate, what are you projecting for its net income?
12.If net working capital varies directly with sales, based on your answer to the previous question, what are you projecting for accounts receivable at the end of 2015?
13.If the dividend payout ratio is kept the same from 2014 to 2015, based on your answer to #15, what are you projecting for retained earnings at the end of 2015?
14.If MMI is operating at 75% capacity, based on FY2014 sales, what is MMI’s full-capacity level of sales?
15.Based on your answer to the last question, what is MMI’s 2014 capital intensity ratio at full-capacity sales?
16.Which one of the following capital intensity ratios indicates the largest need for fixed assets per dollar of sales?
A. 0.50
B. 1.00
C. 1.50
Explanation / Answer
1) After Tax Profit Margin = Net Profit / Sales = 3660/31200 = 11.73%
2)Dividends paid out in 2014 = Beginning Retained Earnings + Net income - Ending Retained Earnings
= 1900 + 3660 - 3560 = $2000
3)Dividend Payout ratio = Dividends paid / Net Income = 2000/3660 = 54.64%
4)After Tax return on equity = Net Income / Average shareholder's equity = 3660/7730 = 47.35% (average shareholder's equity = (6900 + 8560)/2 )
5)After Tax return on assets = Net Income / Average Total Assets = 3660/16180 = 22.62% (average assets = (15800 + 16560)/2 )
6)Sustainable growth rate = retention ratio * ROE = (1 - 54.64%) * 47.35% = 45.36% * 47.35% = 21.47%
7)Internal Growth Rate = Return on Assets * retention ratio / ( 1- (Return on Assets * retention ratio))
= 22.62% * 45.36% / (1- (22.62% * 45.36%))
= 11.43%
8)Debt to Equity Ratio = Total Debt/Total Equity = 2000/8560 = 23.36%
9)Assuming all sales were from credit, collection from customers in 2014
= Beginning Accounts Receivables + Sales - Ending Accounts Receivables
= 5500 + 31200 - 6000 = $30,700
10) If MMI borrowed $750 from its bank at some point during 2014, amount of debt did it repaid during 2014
Beginning debt + 750 - Ending Debt = 2500 + 750 - 2000 = $1250
11)If you expect MMI’s sales to grow by 5% in 2015 with no change in profit margins or effective tax rate, projected net income next year = Net profit margin * 31200 * (1 + 5%) = 11.73% * 32760 = $3843
12) If net working capital varies directly with sales, accounts receivable projected at the end of 2015
= 2014 Accounts Receivable * 1.05 = 6000 * 1.05 = $6300
13) If the dividend payout ratio is kept the same from 2014 to 2015, the retained earnings would be calculated as
(it should be based on answer #11 according to me, so doing as per that only)
Sales as per #11 = 32,760
Assuming net profit margin to be same at 11.73%
Net Income = 11.73% * 32760 = $3843
Dividend to be Paid = Dividend Payout Ratio * Net Income = 54.64% * 3843 = $2100
Projected Retained Earnings for 2015 = 2014 retained earnings + 2015 Net Income - Dividends Paid in 2015
=3560 + 3843 - 2100 = $5303
14) If MMI is operating at 75% capacity, based on FY2014 sales, MMI’s full-capacity level of sales
= 31200/0.75 = $41,600
15)MMI’s 2014 capital intensity ratio at full-capacity sales = 1/Asset Turnover Ratio
= Average Total Assets/ Full Capacity Sales = 16180/ 41600 = 38.89%
16) Ans is C)1.50
Capital Intensity Ratio = Average Assets / Sales which is a measure of assets requiered per dollar of sales. So, out of the three option, 1.5 indicates the largest need for fixed assets per dollar of sales.
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