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Plank’s Plants had net income of $6,000 on sales of $70,000 last year. The firm paid...

Plank’s Plants had net income of $6,000 on sales of $70,000 last year. The firm paid a dividend of $960. Total assets were $300,000, of which $120,000 was financed by debt. a. What is the firm’s sustainable growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) b. If the firm grows at its sustainable growth rate, how much debt will be issued next year? (Do not round intermediate calculations.) c. What would be the maximum possible growth rate if the firm did not issue any debt next year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

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Answer #1

Given Information:-

net sales= $70,000

Net Income= $6000

Dividend= $960

Total Asset= $300000

Total Debt = $120000

Total Equity= Assets- Debts= 300000-120000=$180000

A.Sustainable growth rate= ROE*(1- dividend payout ratio)

ROE= Net Income/ Equity= 6000/180000=0.033

Dividend Payout ratio= dividend paid/net income= 960/6000=0.16

Sustainable growth rate = 0.033*(1-0.16)=2.8%

B. At the sustainable growth Assets will increase by 2.8% so increase in asset will be 2.8% of 300000=$8400

Existing Debt to Asset ratio = 120000/300000=0.40

This new debt i.e increase in debt will be increase in asset * debt to Asset ratio

= 8400*0.40= $3360

C. Maximum possible growth rate= (1- dividend payout ratio)*ROE*Equity/assets

= (1-0.16)*0.033*(180000/300000)=1.66% = 1.7% approx

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