Question 1: Sustainable Growth Rate The Steiben Company has a ROE of 8.50 percent and a payout ratio of 35 percent.
a. What is the company’s sustainable growth rate?
b. Can the company’s actual growth rate be different from its sustainable growth rate? Why or why not?
c. How can the company change its sustainable growth rate?
Question 2: Return on Equity Firm A and Firm B have debt/total asset ratios of 60 percent and 40 percent and returns on total assets of 20 percent and 30 percent, respectively. Which firm has a greater return on equity?
Question 3: External Funds Needed The Optical Scam Company has forecast a 20 percent sales growth rate for next year. The current financial statements are shown below.
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INCOME STATEMENT
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SALES
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$ 38,000,000.00
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COSTS
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$ 33,400,000.00
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TAXABLE INCOME
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$ 4,600,000.00
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TAXES
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$ 1,610,000.00
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NET INCOME
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$ 2,990,000.00
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DIVIDENDS
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$ 1,196,000.00
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ADDITIONS TO RETAINED EARNINGS
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$ 1,794,000.00
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Balance Sheet
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ASSETS
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LIABILITIES AND EQUITY
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Current assets
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$ 9,000,000.00
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Short-term debt
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$ 8,000,000.00
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Fixed assets
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$ 22,000,000.00
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Long-term debt
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$ 6,000,000.00
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Common stock
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$ 4,000,000.00
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Accumulated retained earnings
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$13,000,000.00
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Total equity
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$17,000,000.00
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Total assets
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$ 31,000,000.00
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Total liabilities and equity
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$31,000,000.00
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a. Using the equation from the chapter, calculate the external funds needed for next year.
b. Construct the firm’s pro forma balance sheet for next year and confirm the external funds needed you calculated in part (a).
c. Calculate the sustainable growth rate for the company.
d. Can Optical Scam eliminate the need for external funds by changing its dividend policy?
What other options are available to the company to meet its growth objectives?
Question 4: Ratios and Fixed Assets The Le Bleu Company has a ratio of long-term debt to total assets of 0.70 and a current ratio of 1.20. Current liabilities are $850, sales are $4,310, profit margin is9.5 percent, and ROE is 21.5 percent. What is the amount of the firm’s net fixed assets?
Question 5: Identify the major financial reporting requirements for a U.S. public corporation. What are the interactions among these statements and what information is provided in each statement?