A company with $50 million in assets and $8 million in net income is planning to grow its assets by 10% and its net income by only 8%. How much external financing will it need if its retention ratio is: a. 30% b. 40% . 

 2. A company with $100 million in assets and $15 million in net income has a debt to equity ratio of 1.00. It is planning on growing its assets and net income by 20% while maintaining its debt to equity ratio. Its retention ratio is 50%. 

a. What will be the new level of total equity? 

b. What will be the new level of total debt? 

c. How much will be added to total equity from additions to retained earnings? 

d. How much will the common stock part of Owner’s Equity have to change? 

Describe what happens to new equity needed when a company decides to reduce its retention ratio. 

Describe what happens to the debt to equity ratio if a company decides to fund an increase in assets (net of any additions to retained earnings) using only debt.

Two companies, A and B, have the same level of assets, net income and retention ratios and are planning to grow both assets and net income by 15%. Yet after the increase in assets and net income, Company A’s debt to equity ratio is larger than Company B’s. 

Explain how this can happen.

Answer rating: 100% (QA)

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