Question

The Expo Company has the most recent financial statements as follows. The current liabilities are consisted...

The Expo Company has the most recent financial statements as follows. The current liabilities are consisted solely of accounts payables. The company maintains a constant dividend payout ratio. The projected sales growth over the next year is 10%. If the Expo Company does not want to incur any additional external financing, what is the maximum rate of growth the firm could achieve?

Income Statement

Balance Sheet

Assets

Liabilities and Owners' Equity

Sales

4,200.0

Current Assets

900.0

Current Liabilities

500.0

Costs

3,800.0

Net fixed assets

2,100.0

Long-term debt

1,800.0

Taxable Income

400.0

Owners' equity

700.0

Taxes (34%)

136.0

Total Assets

3,000.0

Total liabilities and owners' equity

3,000.0

Net Income

264.0

Dividends

132.0

Addition to retained earnings

132.0
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Answer #1

The maximum rate of growth the firm could achieve is the Sustainable growth rate (SGR) for the entity

Retention ratio

Retention ratio = [Addition to retained earnings / Net Income] x 100

= [$132 / $264] x 100

= 50.00%

Return on assets (ROA)

Return on assets (ROA) = [Net Income / Total assets] x 100

= [$264 / $3,000] x 100

= 8.80%

Sustainable growth rate (SGR)

Sustainable growth rate (SGR) = [ROA x Retention ratio] / [1 – (ROA x Retention ratio)]

= [0.0880 x 0.50] / [1 – (0.0880 x 0.50)]

= 0.0440 / [1 - 0.0440]

= 0.0440 / 0.9560

= 0.0460 or

= 4.60%

Therefore, the maximum rate of growth the firm could achieve is 4.60%

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