Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton’s balance sheet as of December 31, 2013, is shown here (millions of dollars):
Cash $6.65
Recievables 21.00
Total Current Assets 86.65
Net Fixed Assets 55.00
Total Assets 141.65
Accounts Payable 6.25
Notes Payable 23.75
Line of Credit 0.00
Accuals 8.50
Total Current Liabilities 38.00
Mortgage 5.00
Common Stock 16.50
Retained Earnings 81.65
Total Liabilities and Equity 141.65
Sales for 2013 were $375.00 million and net income for the year was $10.00 million, so the firm’s profit margin was 2.6667%. Upton paid dividends of $4.20 million to common stockholders, so its payout ratio was 52.25%. Its tax rate was 40%, and it operated at full capacity. Assume that all assets/sales ratios, spontaneous liabilities/sales ratios, the profit margin, and the payout ratio remain constant in 2014.
b. Using the AFN equation, determine Upton’s self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds?
Answer is either:
a). 4.73
b). 3.32
c). 4.07
d). 4.65
e). 3.91