Question

Use the following financial statements for Lake of Egypt Marina, Inc.

  

LAKE OF EGYPT MARINA, INC. Balance Sheet as of December 31, 2015 and 2014 (in millions of dollars)
	2015			2014				2015			2014
Assets							Liabilities and Equity
Current assets:							Current liabilities:
Cash and marketable securities	$	73		$	64		Accrued wages and taxes	$	41		$	44
Accounts receivable		117			112		Accounts payable		91			81
Inventory		202			192		Notes payable		81			71
Total	$	392		$	368		Total	$	213		$	196
Fixed assets:							Long term debt:	$	301		$	281
Gross plant and equipment	$	582		$	473		Stockholders’ equity:
Less: Depreciation		124			101		Preferred stock (5 million shares)	$	5		$	5
							Common stock and paid-in surplus        (65 million shares)		65			65
Net plant and equipment	$	458		$	372		Retained earnings		317			243
Other long-term assets		51			50
Total	$	509		$	422		Total	$	387		$	313
Total assets	$	901		$	790		Total liabilities and equity	$	901		$	790

LAKE OF EGYPT MARINA, INC. Income Statement for Years Ending December 31, 2015 and 2014 (in millions of dollars)
	2015			2014
Net sales (all credit)	$	525		$	442
Less: Cost of goods sold		235			180
Gross profits	$	290		$	262
Less: Other operating expenses		31			26
Other operating expenses
Earnings before interest, taxes, depreciation, and amortization (EBITDA)	$	259		$	236
Less: Depreciation		23			21
Earnings before interest and taxes (EBIT)	$	236		$	215
Less: Interest		34			31
Earnings before taxes (EBT)	$	202		$	184
Less: Taxes		58			56
Net income	$	144		$	128
Less: Preferred stock dividends	$	5		$	5
Net income available to common stockholders	$	139		$	123
Less: Common stock dividends		65			65
Addition to retained earnings	$	74		$	58
Per (common) share data:
Earnings per share (EPS)	$	2.138		$	1.892
Dividends per share (DPS)	$	1.000		$	1.000
Book value per share (BVPS)	$	5.877		$	4.738
Market value (price) per share (MVPS)	$	14.85		$	12.65

Calculate the internal and sustainable growth rate for Lake of Egypt Marina, Inc. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Internal growth rate	%
Sustainable growth rate	%

Answer 1

ROA = Profit Margin x Total asset turnover = 27.43% x 0.1703 times = 4.67%

ROE = Profit Margin x Total asset turnover x Equity multiplier = 27.43% x 0.1703 times x 2.28 times =34.50%

Profit Margin = Net Income /Sales * 100

= 144 / 525 * 100

= 27.43 %

Total asset turnover = Net Income / Average total assets

= 144 / [(901 +792)/2]

= 0.1703

Equity Multiplier = Total Assets / Shareholders equity

= 901 / 387

= 2.33

Internal growth rate = ROA * Retention ratio / (1 - ROA) * (1 - Retention ratio )

= 4.67 % * 0.53 / (1 - 0.0467)* (1 - 0.53)

= 5.53 %

Sustainable growth rate = ROE * Retention ratio / 1 - ( ROE * (1 - Retention ratio))

= 0.3450 * 0.53 / 1 - (0.3450 * (1 - 0.53))

= 21.82 %