Explore BrainMass
Share

Capital Structure and Growth Plans

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Sustainable growth. A firm has decided that its optimal capital structure is 100 percent equity financed. It perceives its optimal dividend policy to be a 40 percent payout ratio. Asset turnover is sales/assets - .8, the profit margin is 10 percent, and the firm has a target growth rate of 5 percent.

1. Is the firm's target growth rate consistent with its other goals?
2. If not, by how much does it need to increase asset turnover to achieve its goals?
3. How much would it need to increase the profit margin instead?

© BrainMass Inc. brainmass.com October 16, 2018, 10:24 pm ad1c9bdddf
https://brainmass.com/business/capital-structure-and-firm-value/capital-structure-and-growth-plans-219564

Solution Preview

To solve the problem, we can arbitrarily assign a value for sales. Any value will work so long as we are consistent using the percentages and ratios given. For ease of use, let's use $1,000,000 in 1st year sales.

Year 1 Year 2
Sales $1,000,000 $1,050,000 (5% growth)
Profit (10%) $100,000 $105,000
Dividends (40%) $40,000 $42,000
Retained Earnings $60,000 $63,000

Since we know the asset turnover ...

Solution Summary

The solution considers a firm's desired capital structure and balances it against its futuer growth plans in an effort to make recommendations that will satisfy both requirements.

$2.19
Similar Posting

Lester Electronics Financing Alternative Benchmarking Paper

This document is a benchmark of LEI electronics. The research conducted in this document was based upon the key concepts of; mergers and options, determination of growth, recent trends in capital structure, financial leases/sale and lease back. The companies that have been included in this document are; Mcdonalds, Chipotle Mexican Grill, Cingular, Apollo Group, Captaris, Quest Diagnostics, and Whole Foods Market Inc. Mergers are structured as either cash-for-stock or stock-for- stock transactions. The selling transactions receive cash from the buyer in the first type of transaction and receive stock in the buying company in the second type of transaction. Mcdonald's initially invested in Chipotle in 1998 when the Denver based burrito restaurant had about 15 units, making chipotle the first concept other than its own McDonalds ever invested in. McDonalds grew to become Chipotle's largest investor in 2001. McDonald's investment helped chipotle build a national brand with more than 500 restaurant. "McDonald's original investment represented a strong vote of confidence in what Chipotle was doing at the time," said Steve Ells, founder, Chairman and CEO of Chipotle, who sought McDonald's as an investor to help finance the growth of his small burrito chain. "They have been a terrific partner for us, providing needed capital, shared access to other resources as needed, and also the autonomy to pursue our vision" (Arnold, 2006).

View Full Posting Details