Growth Rate Question

CFA Level I
#1

For a given par value, which of the following debt issues will have the highest cash flows from financing?

Net profit margin

15%

Sales

$10,000,000

Interest payments

$1,200,000

Avg. assets

$15,000,000

Equity

$11,000,000

Avg. working capital

$800,000

Dividend payout rate

35%

Which of the following is the closest estimate of the firm’s sustainable growth rate?

a:8%

b:10%

c:9%

(ANS c)

ROE = Net Profit Margin * Asset turnover * Leverage = .15*.67*1.1364 =0.137

Growth = (1- Div rate )* ROW = 8.9%

Can someone please explain how to get asset turnover and leverage?

Thanks

#2

Asset Turnover = Sales / Average Assets = 10/15 = 0.67 Financial Leverage = Average Assets / Average Equity = 15/11 = 1.362

To calculate the ROE instead of using all the components of the Du-Pont formula it might be quicker to calculate the ROE directly as all the information is there:

ROE = NI / Equity = (10*15%)/11 = 0.137

From there you calculate the the sustainable growth rate b:

b = retention rate * ROE = (1-0.35) * 0.137 = 0.0886 = 8.86

Regards, Oscar