1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
RideAnS [48]
2 years ago
5

In the chapter, we used Rosengarten Corporation to demonstrate how to calculate EFN. The ROE for Rosengarten is about 7.3 percen

t, and the plowback ratio is about 67 percent. If you calculate the sustainable growth rate for Rosengarten, you will find it is only 5.14 percent. In our calculation for EFN, we used a growth rate of 25 percent. Is this possible
Business
1 answer:
satela [25.4K]2 years ago
7 0

Answer:

Explanation:

Sustainable Growth:

The maximum growth rate a firm can achieve with no external equity financing while maintaining  a constant debt-equity ratio is known as Sustainable Growth Rate. It is the maximum rate of  growth a firm can maintain without increasing its financial leverage.

The formula for finding out the sustainable growth rate is:

sustainable\, grwth\, rate=\frac{ROE \times b}{1-ROE \times b}

Where

ROE — Retum On Equity

b — plowback or retention ratio

ROE is the product of profit margin, total asset turnover and equity multiptier.

External Financing Needed (EFN) is the increase in assets minus the addition to retained

earnings.

EFN = Increase in assets - Addition to retained earnings

The increase in assets is the product of the beginning assets and the growth rate.

Increase in assets = Beginning assets x growth rate

The addition to the retained earnings next year is the product of current net income and the

retention ratio and one plus growth rate.

Addition to retained earnings = Current net income x retention ratio x(1+ growth rate)

The ROE of Rosengarten Corporation is 7.3%, plowback ratio is 67%. Then, the sustainable  growth rate is 5.14% only. The question is whether a growth rate of 25% can be used to calculate  the EFN (External Funds Needed).

The growth rate of 25% can be used to calculate the EFN. The sustainable growth rate formula is

based on two assumptions that the company does not want to sell new equity, and that the  financial policy is fixed. If the company rises outside equity, or increases its debt-equity ratio. it  can grow at a higher rate than the sustainable growth rate.

A firm's ability to sustain growth depends on the following four factors:

1. Profit Margin: An increase in profit margin will increase the firm's ability to generate funds

internally and thereby increase its sustainable growth.

2. Dividend policy: A decrease in the percentage of net income paid out as dividends will

increase the retention ratio. This increase internally generated equity and thus increases

sustainable growth.

3. Financial policy: An increase in the debt-equity ratio increases the firm’s financial leverage.

Since this makes additional debt financing available, it increases the sustainable growth rate.

4. Total asset turnover: An increase in the firm's total asset turnover increases the sales  generated for each dollar in assets. This decreases the firm’s need for new assets as sales grow  and thereby increases the sustainable growth rate. The increasing total asset turnover is the

same as decreasing capital intensity.

The sustainable growth rate illustrates the explicit relationship between the firm's four major  areas; its operating efficiency as measured by profit margin, its asset use efficiency as measured  by total asset turnover, its dividend policy as measured by the retention ratio, and its financial  policy as measured by the debt-equity ratio.

Thus, the company could also grow faster when its profit margin increases, it it changes its dividend policy, by increasing the retention ratio or by increasing its total asset turnover.

You might be interested in
Precision Paper Products produces both paper towels and paper napkins. The production process begins with the receipt and pulpin
alexdok [17]

Answer:

d. The maintenance costs associated with the napkin folding machine.

Explanation:

The cost that required one or more processors to produced a final product is known as joint cost

Here in the given question, the maintenance cost is not considered to be a joint cost as this cost are associated with the paper napkins

Also, the pulping, screening, rolling, etc are considered to be joint cost

Hence, the correct option is d.

4 0
3 years ago
Wolery Inc. has provided the following data concerning one of the products in its standard cost system. Inputs Standard Quantity
nadezda [96]

Answer: The labor efficiency variance for the month is closest to: $2576

Explanation:

Given:

Actual output 8,800 units

Actual direct labor-hours 1,610 hours

Actual direct labor rate $ 23.30 per hour

The labor efficiency variance for the month is computed as :

The labor rate variance = Actual hours×(Actual rate - Standard rate)

=1610 ×($23.30-$21.70)

=$2576

7 0
3 years ago
Read 2 more answers
15. The Eller Mutual Fund had a Net Asset Value (NAV) per share of $17.50 on January 1, 2019. On December 31, 2019 the fund’s NA
klio [65]

Answer:

The rate of return is 21.26%

Explanation:

Before calculating the return in percentage terms, it would be more appropriate to start with computing the return on the mutual fund in dollars ' terms.

Return in dollars terms;

Net Asset Value on 31 December 2019              $19.47

less

Net Asset Value on 1 January 2019                    ($17.50)

return  on NAV                                                      $1.97

Add:

Income distributions                                             $0.75

Capital gains distributions                                     $1.00

Total return on mutual fund                                   $3.72

Rate of return=total return mutual fund/Opening net asset value

rate of return =$3.72/$17.50

                       =21.26%

7 0
3 years ago
Economics-- multiple choice!
artcher [175]

Answer:

combat unemployment?

Explanation:

That seems the likeliest answer compared to the others since national parks provide jobs.

5 0
2 years ago
The expected return on the market portfolio is 18%. The risk-free rate is 10%. The expected return on SDA Corp. common stock is
svlad2 [7]

Answer:

The answer is SDA Corp stocks alpha is -1.75%

Explanation:

CAPM E(r_{SDA}) = 10 + 1.25(17 - 10) =

                         = 10 + 1.25(7)=

                         = 10 + 8.75

                          = 18.75%

\alpha_Sda = 17 - 18.75

         = -1.75%

8 0
3 years ago
Other questions:
  • Why might a large research company use the Linux operating system? A. It can be modified to fit the specific needs of the compan
    7·1 answer
  • a company's actual results for revenues, net profits, EPS, and ROE turn out to be worse than projected, then it is usually becau
    14·1 answer
  • The slope of the budget line represents the rate at which the consumer is willing to trade one good for another at any given bun
    10·1 answer
  • A subsidiary sells inventory to its parent at a markup of 30% on cost. in 2019, the parent paid $650,000 for merchandise receive
    15·1 answer
  • As the price level rises, the cost of borrowing money will , causing the quantity of output demanded to . This phenomenon is kno
    14·1 answer
  • 2. Identify the type of scale of measurement (nominal, ordinal, interval or ratio) appropriate for each of the following types o
    12·1 answer
  • According to the path-goal theory, employees with an internal locus of control should prefer a leader who is __________.
    8·1 answer
  • The three "R's" of socially responsible business are "reuse," " recycle," and "____."
    6·2 answers
  • While driving home for the holidays, you can’t seem to get Little’s Law out of your mind. You note that your average speed of tr
    7·1 answer
  • The Bombay Company, Inc., sold a line of home furnishings that included furniture, wall decor, and decorative accessories. Bomba
    9·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!