Last year, Marly Brown, Inc. reported an ROE of 21 percent. The firm’s debt-to-e
ID: 2817227 • Letter: L
Question
Last year, Marly Brown, Inc. reported an ROE of 21 percent. The firm’s debt-to-equity was 1.5 times, sales were $20.2 million, the capital intensity was 1.20 times, and dividends paid to common stockholders were $1,020,000. The firm has no preferred stock outstanding. This year, Marly Brown plans to decrease its debt-to-equity ratio to 1.3 times. The change will not affect sales, total assets, or dividends paid, however, it will reduce the firm’s profit margin to 9.95 percent.
Calculate the internal growth rate for last year and this year and change in these numbers? (Do not round intermediate calculations and round your final answers to 2 decimal places.)
Explanation / Answer
LAST YEAR A Sales Revenue $20,200,000 B Capital Intensity 1.20 C=A*B Total Assets $24,240,000 D Debt Equity Ratio 1.5 Debt=1.5* Equity TotalAssets=Debt +Equity TotalAssets=2.5* Equity E=C/2.5 Equity $9,696,000 F=1.5*E Debt $14,544,000 G Return on Equity =21% 0.21 H=G*E Net Income $2,036,160 I Dividend paid $1,020,000 J=H-I Retained Earnings $1,016,160 IGR1=J/C InternalGrowth Rate=Retained Earning/Total Assets 0.041920792 IGR1 InternalGrowth Rate(percentage) 4.19% THIS YEAR A Sales Revenue $20,200,000 B Capital Intensity 1.20 C=A*B Total Assets $24,240,000 D Debt Equity Ratio 1.3 Debt=1.3* Equity TotalAssets=Debt +Equity TotalAssets=2.3* Equity E=C/2.3 Equity $10,539,130 F=1.3*E Debt $13,700,870 G Return on Equity =9.95% 0.0995 H=G*E Net Income $1,048,643 I Dividend paid $1,020,000 J=H-I Retained Earnings $28,643 IGR2=J/C InternalGrowth Rate=Retained Earning/Total Assets 0.001181662 IGR2=J/C InternalGrowth Rate(percentage) 0.12%
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