Refer to the following information to answer questions 5 through 7: 2017 Net Inc

Question

Refer to the following information to answer questions 5 through 7: 2017 Net Income, $4,000,000; 2017 Total Assets, S8,500.000; 2017 Total Equity, $5,500,000 2017 Dividend Payout Ratio, 35% 5. What is this company's Internal Growth Rate? 6. What is this company's Sustainable Growth Rate? 7. If this company increases its revenues by 9% in 2018 (use percent of sales method): a. What will be its 2018 Net Income? b. What will be its 2018 Total Assets? c. How much will be added to Retained Earnings? d. How much, if any, additional funding will be needed?

Explanation / Answer

5 Computation of Internal growth rate Internal growth rae = ROA * retention ratio )/[(1-ROA)*Retention ratio] retention ratio =1-payout ratio =1-35% =0.65 ROA = Net income /Total Assets =4000,000/8500,000 =0.4706 =47.06% Internal growth rate =(0.4706*0.65) /[(1-0.4706)*0.65] =0.8889 =88.89% 6 Sustainable growth rate Sustainable growth rate =Earnings Retention ratio * return on equity Return on equity =Net Income /Total Equity =$4000,000/$5500,000 =0.7273 =72.73% Sustainable growth rate =0.65*72.73% =47.27% 7 if the company increses its revenue by 9% in 2018 (a) Net income in 2018 Net Income in 2018 =$4000,000*1.09 =$4360,000 (b) Total Assets in 2018 Total Asstes in 2018 =$8500,000*1.09 =$9,265,000 (c ) Addtion to the retained earnings Net Income in 2018 43,60,000 Less: Dividend paid ( 4360000*0.35) 1526000 Addition to retained earnings 28,34,000 (D) How much additonal Funds needs Fixed assets addtions (765,000) are less then the retained earnings of $2834,000, So No additional funds needed

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