Question

Derby Company has sales of $300,000 and profit margin of 9%. It pays $18,000 as dividends. Its assets total $200,000 and total equity is $120,000. Calculate its sustainable growth rate.

A firm with annual sales of $450 million cut its average collection period from 60 days to 45 days. By how much is the accounts receivable balance change? Indicate decrease by negative and write answer in millions of dollars.

Answer 1

1)

Sales = $300,000

Profit margin = 9%

Net Profit = Profit margin * Sales = 9% * 300,000 = $ 27,000

Dividends = 18,000

Retention ratio = (27,000- 18,000)/ 27,000 = 33.33%= 1/3

ROE = Net Profit/ Equity = 27,000/120,000 = 22.5%

Sustainable growth rate = ROE * Retention ratio = 22.5% * 33.33% = 7.5%

2)

Assuming 360 days in a year

Annual sales =$ 450 M

Average collection period = 360/ Sales * (Account receivables)

60 = 360/ Sales * Account receivables

Account receivables = 60/360 * 450 = $ 75 M

New Average collection period = 45 days

New Account receivables = 45/360 * 450 = $ 56.25 M

Change in Account receivables = (56.25 M - 75 M) = - $ 18.75 M