Chapter 4
Problems
1- Given the following information: sales = $450; costs = $400; tax rate = 34%.
Assuming costs run at a constant percentage of sales, if sales rise by 10% next
year, what will net income be? ($36.3)
2- A firm earns net income of $25,000 in a given year and the firm's retained
earnings increase $15,000 for that same year. The retention ratio is: (60%)
3- Given the following information: sales = $450, costs = $350, tax rate = 34%,
retention ratio = 30%, sales increase = 10%. What is the expected addition to
retained earnings? (Assume costs change directly with sales.) ($21.78)
4- Given the following information: assets = $900; accounts payable = $110; notes
payable = $100; long-term debt = $150; equity = $540; sales = $450; costs =
$400; tax rate = 34%; dividends = $16. 50. Costs, assets, and accounts payable
maintain a constant ratio to sales. How much external financing is needed if sales
increase 15% and the dividend payout ratio is constant? ($100)
5- Suppose a firm has net income of $100 and a profit margin equal to 14%. If the
firm is working at 2/3 capacity, then full capacity sales are: ($1,071)
6- Knudsen, Inc. 's firm's full-capacity sales level is $3,000,000. If the firm is
currently operating at 80% of capacity, what is the current level of sales?
($2,400,000)
7- Given the following information: current assets = $400; fixed assets = $500;
accounts payable = $100; notes payable = $45; long-term debt = $455; equity =
$300; sales = $450; costs = $400; tax rate = 34%. Suppose that current assets,
costs, and accounts payable maintain a constant ratio to sales. What is the total
external financing needed if sales increase 25%? Assume the firm pays no
dividends. ($33.75)
8- Moore Money Inc has a profit margin of 11% and a retention ratio of 70%. Last
year, the firm had sales of $500 and total assets of $1,000. What is the internal
growth rate? (4%)
9- Given the following information: profit margin = 10%; sales = $100; retention
ratio = 40%; assets = $200; equity multiplier = 2.0. If the firm maintains a
constant debt-equity ratio and no new equity is used, what is the maximum
growth rate? (Assume a constant profit margin.) (4.17%)
10- Simply Red, Inc. has a return on equity of 14%, a dividend payout ratio of 20%,
an equity multiplier of 1.4, and a profit margin of 1.2%. What is the sustainable
growth rate? (12.6%)
Use the following to answer problems 11 and 12
Net income = $150; Total assets = $1,000; Total liabilities = $400; Total asset turnover =
4. 0
11- What is the capital intensity ratio assuming dividends paid total $100? (0.25)
12- What is the internal growth rate assuming dividends paid total $100? (5.3%)