Homework Answers
Answer (a):
Correct answer is:
A. - $736
Explanation:
The company is currently operating at 82% capacity.
Current sales = $38,900
Sales at 100% capacity = 38900 / 82% = 47439.02
Projected sales = 38900 * (1 + 20%) = $46,680
Hence:
For 20% increase in sales, there is no new fixed asset is necessary.
As such:
AFN = (Current Assets / Sales) * ∆ Sales - (Spontaneous liabilities / Sales) * ∆ Sales - Projected Sales * After-tax profit margin * (1 - Dividend Payout ratio)
∆ Sales = 38900 * 20% = $7780
After tax profit margin = 1950 / 38900
Dividend payout ratio = 390 / 1950 = 20%
AFN = 13800 / 38900 * 7780 - 8120 / 38900 * 7780 - 46680 * 1950 / 38900 * (1 - 20%)
= - $736
As such option A is correct and other options B, C and D are incorrect.
Answer (b):
Correct answer is:
A. $0
Explanation:
By definition sustainable growth rate is the maximum growth rate a company can sustain without having to finance growth with additional equity or debt.
As such if company grows at sustainable growth rate, new debt required = $0
We can work this out also
Sustainable growth rate = ROE x RR / 1- (ROE x RR)
ROE = 18500 / 250000 =7.40%
Dividend payout ratio =7400 / 18500 =40%
RR = 1 - dividend payout ratio = 1 - 40% = 60%
Sustainable growth rate = 7.40% * 60% / (1 - 7.40% * 60%) = 4.6463%
∆ Sales = 200000 * 4.6463% = $9292.60
Projected sales = 200000 + 9292.60= 209292.60
Net income margin = 18500 / 200000 = 9.25%
Current liability = 300000 - 250000 = 50,000
AFN = (Assets / Sales) * ∆ Sales - (Spontaneous liabilities / Sales) * ∆ Sales - Projected Sales * After-tax profit margin * (1 - Dividend Payout ratio
= 300000 / 200000 * 9292.60 - 50000 /200000 * 9292.60 - 209292.60 * 9.25% * (1 - 40%)
= 0
As such option A is correct and other options B, C and D are incorrect.
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