Question

Abbreviated financial statements for Archimedes Levers are shown in the table below. Assume sales and expenses increase by 18% in 2017 and all assets and liabilities increase correspondingly. Income Statement Sales Costs, including interest Net income S 5,600 4,300 S 1,300 Balance Sheet, Year-End 2016 4,7044,300 2015 2016 2015 Net assets Debt s 1,904$1,833 Equity0 46 S 4,704 Total S 4,704 $4,300 Total S 4,300 a. If the payout ratio is set at 50% and no external debt or equity is to be issued, what is the maximum possible growth rate for Archimedes? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Internal growth rate b. Ir the payout ratio is set at 50% and the firm maintains a fixed debt ratio but issues no equity, what is the maximum possible growth rate ror Archimedes? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Sustainable growth rate

Answer 1

Ques 1

Income Statement	Normal	14% increase
Sales	$           5,600	$           6,608	(5600*1.18)
Costs, including interest	$           4,300	$           5,074	(4300*1.18)
Net income	$          1,300	$          1,534
Computation of the Equity Ratio
Payout Ratio	50%
Net Income	$           1,534
First We calculate the Return on Equity (ROE)
ROE	Net Income
	Equity
Where As
Net Income	$          1,534
Equity	$          2,800
ROE	$          1,534
	$          2,800
ROE	54.79%
Equity Ratio	Equity
	Total Assets
Where as
Equity	$           2,800
Total Assets	$           4,704
Equity Ratio	$          2,800
	$          4,704
Equity Ratio	59.52%
Than Calculate the Growth Rate
ROE	54.79%
Equity Ratio	59.52%
Pay out Ratio	50.00%
Growth Rate	ROE*Equity ratio*payout ratio
Growth Rate	16.31%

Ques 2

The Firm maintains the Fixed Debt Ratio but no issues on equity Than the company maintains a sustainable growth
				Growth rate	Payout ratio*Return on Equity
Where as
ROE	54.79%
Pay out Ratio	50.00%
Growth rate	27.39%