Cost of debt, iD 5.43%
Corporate tax rate, TC 10.99%
Total debt, D 57,104,000,000
Total equity, E 91,560,000,000
Total value of the firm, V 148,664,000,000
Beta, β 0.61%
Return on the market, iM 11%
Risk-free rate, iF 3%
WACC 6.71%

From the balance sheet:
Period ending Last Fiscal Year Last Fiscal Year -1 Last Fiscal Year -2
Short term debt + Current portion of long term debt (CMLTD) 7,205,000 4,993,000 2,954,000
Long Term Debt 55,051,000 46,959,000 28,203,000
Total debt, D 62,256,000 51,952,000 31,157,000



From the income statement:
Period ending Last Fiscal Year Last Fiscal Year -1 Last Fiscal Year -2
Interest expense 3,102,000 1,819,000 1,829,000
Income before tax 11,015,000 9,759,000 9,492,000
Income tax 1,210,000 3,331,000 3,982,000
Other data:
Firm’s current market capitalization (intraday sock price ∙ shares outstanding) 91.56B
Firm’s beta, β 0.61
Return on the market, iM Assume 11%
Risk-free rate, iF Assume 3%

Financial Analysis Exercise IV

Part B: Dividend Payout and Growth Ratios Worksheet

Recall from Module 1 the following two ratios:

Internal growth rate = (ROA ∙ RR) / [1-(ROA ∙ RR)] (Eq. 3-30)

where RR = Retention ratio = (Addition to retained earnings)/Net income (Eq. 3-31)

– The internal growth rate measures the amount of growth a firm can sustain if it uses only internal financing (retained earnings)

Sustainable growth rate = (ROE ∙ RR) / [1-(ROE ∙ RR)] (Eq. 3-33)

– If the firm uses retained earnings to support asset growth, the firm’s capital structure will change over time, i.e., the share of equity will increase relative to debt

– To maintain the same capital structure managers must use both debt and equity financing to support asset growth

– The sustainable growth rate measures the amount of growth a firm can achieve using internal equity and maintaining a constant debt ratio

– The sustainable growth rate can alternatively be calculated as follows:

= PRAT/(1- PRAT)

where P = Profit margin = operating efficiency = Net income/Sales

R = RR = Retention ratio

A = Asset turnover = efficiency in asset use = Sales/Assets

T = Assets-to-equity ratio = financial leverage = Assets/End of Period Equity

1. For the firm selected for Part A, calculate its internal growth rate for the last fiscal year:

= (ROA ∙ RR) / [1-(ROA ∙ RR)]

=

2. Calculate the firm’s sustainable growth rate for the last fiscal year:

= (ROE ∙ RR) / [1-(ROE ∙ RR)]

=

Confirm that your calculation above can also be completed with the following equation:

Sustainable growth rate = PRAT/(1- PRAT)

where P = Profit margin = operating efficiency = Net income/Sales

R = RR = Retention ratio

A = Asset turnover = efficiency in asset use = Sales/Assets

T = Assets-to-equity ratio = financial leverage = Assets/End of Period Equity

P
R
A
T
Product of P∙R∙A∙T

3. Consider your results for parts A and b. Discuss the growth prospects of the firm. Can the firm finance its growth internally? If not, how would you suggest it finance it? Consider the impact of its growth, however financed, on its WACC.

Answer rating: 100% (QA)

1 Internal growth rate ROA RR 1ROA RR 702 6173 1702 6173 1168 Sustainable growth rate ROE RR 1ROE RR ... View the full answer