Question

1) Southern Mfg., Inc., is currently operating at only 94 percent of fixed asset capacity. Current sales are $500,000. Fixed assets are $400,000 and sales are projected to grow to $740,000. How much in new fixed assets are required to support this growth in sales? Assume the company wants to operate at full capacity.

New fix asset?

2) Southern Mfg., Inc., is currently operating at only 90 percent of fixed asset capacity. Current sales are $560,000. How fast can sales grow before any new fixed assets are needed?

Maximum sales grow?

3) A firm wishes to maintain an internal growth rate of 7.7 percent and a dividend payout ratio of 35 percent. The current profit margin is 6.1 percent, and the firm uses no external financing sources.

What must total asset turnover be?

Answer 1

1)Full capacity sales= 500000/94% = 531914.89

Capital intensity ratio= Fixed assets/ Full capacity sales

= 400000/531914.89

=75.2%

Dollar value of fixed assets required at projected sales = 75.2%*740000 = 556480

New fixed assets= 556480- 400000 = $156,480

2)Full capacity sales= 560000/90%= 622222.22

Maximum growth without additional assets= 622222.22/560000 – 1 = 11.11%

3)Retention ratio= 1-0.35 = 0.65

Internal growth rate= 0.77=(ROA*0.65)/(1- (ROA*0.65)

0.77- 0.5005ROA= 0.65ROA

ROA= 0.6693

ROA= PM*Total asset turnover

Hence Total assets turnover= 0.6693/0.061

=10.97%