Question

Intro NiteLate Inc. had revenue of $164,000 last year, costs of $98,400 and depreciation of $24,600. The company paid 6.1% interest on its debt, and its average tax rate is 0.25. NiteLate paid out $16,400 in dividends, and wants to maintain the same dividend payout ratio in the future. At the beginning of the year, the company had a book value of debt of $48,000 and a book value of equity of $40,000. Over the course of the year, no debt or equity was newly issued or retired. Part 1 IB Attempt 1/10 for 10 pts. What was net income last year (in $)? No decimals Submit IB Attempt 1/10 for 10 pts. Part 2 What is the sustainable growth rate? 3+ decimals Submit

Answer 1

Compute the interest on the debt, using the equation as shown below:

Interest = Debts*Rate of interest

             = $48,000*6.1%

             = $2,928

Hence, the interest on debts is $2,928.

Part 1

Compute the net income of the company, using the equation as shown below:

Net income = (Revenues – Cost – Depreciation – Interest)*(1 – Tax rate)

                    = ($164,000 - $98,400 - $24,600 - $2,928)*(1 – 0.25)

                   = $38,072*0.75

                    = $28,554

Hence, the net income of the company is $28,554.

Part 2

Compute the sustainable growth rate, using the equation as shown below:

Sustainable growth rate = (Net income/ Equity)*{(Net income – Dividend)/ Net income}

                                       = ($28,554/ $40,000)*{($28,554 - $16,400)/ $28,554}

                                       = 71.385%*42.564964628%

                                       = 30.385%

Hence, the sustainable growth rate is 30.385%.

Part 3

Compute the existing debt/equity ratio, using the equation as shown below:

Debt-equity ratio = Debt/ Equity

                             = $48,000/ $40,000

                             = 1.2

Hence, the debt-equity ratio is 1.20.

Compute the new equity, using the equation as shown below:

New equity = Existing equity + Net income – Dividend

                   = $40,000 + $28,554 -$16,400

                   = $52,154

Hence, the new equity is $52,154.

Compute the new debt required, using the equation as shown below:

New debt = New equity*Debt-equity ratio) – Existing debt

                 = ($52,154*1.2) - $48,000

                 = $62,584.80 - $48,000

                 = $14,584.80

Hence, the new debt is $14,584.80.

Part 4

Compute the closing assets, using the equation as shown below:

Closing assets = Debt + Equity + Net income – Dividend

                        = $48,000 + $40,000 + $28,554 - $16,400

                        = $100,154

Hence, the closing assets are $100,154.

Compute the average assets, using the equation as shown below:

Average assets = (Opening assets + Closing assets)/ 2

                         = ($88,000 + $100,154)/2

                         = $94,077

Hence, the average assets are $94,077.

Compute the return on assets (ROA), using the equation as shown below:

Return on assets = Net income/ Average assets

                           = $28,554/ $94,077

                           = 30.351733154%

Hence, the ROA is 30.351733154%.

Compute the retention ratio, using the equation as shown below:

Retention ratio = (Net income – Dividend)/ Net income

                        = ($28,554 - $16,400)/ $28,554

                         = 42.564964628%

Hence, the retention ratio is 42.564964628%.

Compute the internal growth rate, using the equation as shown below:

Internal growth rate = (ROA*Retention ratio)/ {1 – (ROA*Retention ratio)}

                                 = (30.351733154%*42.564964628%)/ {1 – (30.351733154% *42.564964628%)}

                                 = 12.9192044809%/ (1 – 0.129192044809)

                                 = 14.836%

Hence, the internal growth rate is 14.836%.