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

Question

Refer to the following information to answer questions 5 through 7 2017 Net Income, $4,000,000; 2017 Total Assets, $8,500,000; 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

answer 5 : Internal growth rate = ROA * B/ (1- (ROA * B)

B = (1 - dividend payout ratio) = 1- 0.35

B = 65%

ROA = nwt income / total assets = 4000000/8500000 = 0.4705

putting these values

IGR = 0.47 * 0.65 /(1 - 0.47 * 0.65)

IGR = 44.06 %

Answer 6 Sustainable growth rate = ROE * ( 1 - dividend payout ratio)

ROE = net income/ equity = 4000000/5500000 = 0.7272

Sustainable growth rate =0.7272 * (1 - 0.35) = 0.4727 or 47.27 %

Answer 7: net income = 4000000 *(1 + 9% ) = $4360000

total assets = 8500000 *1.09 = 9265000

Retained earnings : 4000000*0.65* 0.09 = $234000

External financing needed = partial proforma assets - partial proforma liabilities and owners equity

here we dont know about liabilties so cant comment

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