Question

Major Manuscripts, Inc. 2009 Income Statement Net sales 7,600 Cost of goods sold 6,665 Depreciation 210...

Major Manuscripts, Inc. 2009 Income Statement

Net sales 7,600
Cost of goods sold 6,665
Depreciation 210
Earnings before interest and taxes 725
Interest paid 21
Taxable Income 704
Taxes 245
Net income 459
     Dividends 206
Major Manuscripts, Inc. 2009 Balance Sheet
2009 2009
Cash 2,150 Accounts payable 1,550
Accounts rec. 860 Long-term debt 280
Inventory 2,300 Common stock 2,500
Total 5,310 Retained earnings 4,000
Net fixed assets 3,020
Total assets 8,330 Total liabilities & equity 8,330


Major Manuscripts, Inc. does not want to incur any additional external financing. The dividend payout ratio is constant. What is the firm's maximum rate of growth?

Multiple Choice

  • 2.54%

  • 11.11%

  • 3.12%

  • 4.04%

  • 3.15%

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Answer #1

Given about Major Manuscripts, Inc's that they does not want to incur any additional external financing. In such cases, Maximum growth rate is calculated using formula

Growth rate = (ROA*RR)/(1 - ROA*RR)

Where ROA = return on assets

and RR = retention rate

For Major Manuscripts, Inc,

ROA = net income/total assets = 459/8330 = 5.5%

Retention rate = (Net income - dividend)/net income = (459-206)/459 = 55%

So, Growth rate = (0.0551*0.5512)/(1 - 0.0551*0.5512) = 3.12%

So, Maximum growth rate of the firm is 3.12

Option C is correct.

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