s a firm grows, it must support increases in revenue with new investments in ass
ID: 2811329 • Letter: S
Question
s a firm grows, it must support increases in revenue with new investments in assets. The self-supporting growth nodel helps a firm assess how rapidly it can grow, while maintaining a balance between its cash outflows (increases noncash assets) and inflows (funds resulting from increases in liabilities or equity). onsider this case: Bohemian Manufacturing Company has no debt in its capital structure and has $100 million in assets. Its sales revenues last year were $30 million with a net income of $5 million. The company distributed $1.10 million as dividends to its shareholders last year. hat is the firm's self-supporting growth rate? 6.50% 7.65% 4,06% 1.11% o 0 hich of the following are assumptions of the self-supporting growth model? Check all that apply. The firm maintains a constant ratio of assets to equity The firm maintains a constant net profit margin. The firm's liabilities and equity must increase at the same rate. Common stock is the firm's only form of equity.Explanation / Answer
Answer a.
Payout Ratio = Dividends / Net Income
Payout Ratio = $1.10 million / $5.00 million
Payout Ratio = 0.22
Retention Ratio, b = 1 - Payout Ratio
Retention Ratio, b = 1 - 0.22
Retention Ratio, b = 0.78
Return on Equity = Net Income / Total Equity
Return on Equity = $5.00 million / $100.00 million
Return on Equity = 5.00%
Self-supporting Growth Rate = [ROE * b] / [1 - ROE * b]
Self-supporting Growth Rate = [0.05 * 0.78] / [1 - 0.05 * 0.78]
Self-supporting Growth Rate = 0.039 / 0.961
Self-supporting Growth Rate = 0.0406 or 4.06%
Answer b.
The firm maintains a constant ratio of assets to equity.
The firm maintains a constant net profit margin.
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