Question

Windswept, Inc. 2011 Income Statement ($ in milions)

Answer 1

Answer:

Windswept, Inc.

2011:

1. Equity multiplier = Total Assets / Stockholders' Equity

= $6,040/$3,710 = 1.628

2. Retention Ratio = Retained Earnings for the current period / Net Income = ($710 - $530)/$481 = 0.374 or 37%

3. ROA (Return on Assets): ROA = Net Income / Total Assets

= $481 /$6,040 = 0.0796 or 7.96%

4. ROE (Return on Equity) = Net Income / Average Equity

= $481 / $3,720 = 0.1293 or 12.9%

Average Equity = ($3,730 + 3,710) / 2 = $3,720

5. Internal Growth Rate = Retained Earnings / Total Assets

= $710 / $6,040 = 0.1175 or 11.75%

6. Sustainable Growth Rate = Earnings Retention Rate x Return on Equity

= 37% x 12.9% = 0.0477 or 4.77%

Explanation:

a) Windswept, Inc. 2011 Income Statement ($ in millions)

Net sales                                     $8,450

Less: Cost of goods sold              7,240

Less: Depreciation                           400

Earnings before interest and taxes 810

Less: Interest paid                             70

Taxable Income                             $740

Less: Taxes                                     259

Net income                                    $481

b) Windswept, Inc 2010 and 2011 Balance Sheets ($ in millions)

                              2010     2011                                   2010           2011

Cash                    $ 120      $140   Accounts payable $1,110       $1,120

Account rec.          930       780    Long-term debt       840         1,210

Inventory              1480     1520    Common Stock    3,200        3,000

Total                 $2,530  $2,440    Retained Earnings 530            710

Net fixed assets 3,150    3,600      Total Liabilities &

Total assets    $5,680  $6,040                    equity $5,680     $6,040

c) Equity Multiplier is a financial leverage ratio that determines the percentage of a company's assets that is financed by stockholders' equity or debt.  The formula for equity multiplier is total assets divided by stockholders' equity.

d) Retention ratio is the percentage of current period's retained earnings to the net income.  It shows how much the business has retained from income to grow the business further.  It is the opposite of the payout ratio, which measures the percentage of profit paid out to shareholders as dividends.

e) ROA (Return on Assets) measures the profitability of the business in relation to its assets.

f) ROE (Return on Equity) measures the profitability of the business in relation to its equity or net assets.

g) The internal growth rate (g) for a public company is calculated by taking the firm's retained earnings and dividing by total assets, or by using return on assets formula (net income / total assets).

h) The Sustainable growth rate is calculated by multiplying a company's earnings retention rate by its return on equity.