# Sustainable growth rate, effective rate of interest

1) A firm's profit margin is 10% and its asset turnover ratio is .6. It has no debt, has net income of $10 per share, and pays dividends of $4 per share. What is the sustainable growth rate?

2) A bank loan has a quoted annual rate of 6%. However, the borrower must maintain a balance of 25% of the amount of the loan, and the balance does not earn any interest.

a) What is the effective rate of interest if the loan is for 1 year and is paid off in one payment at the end of the year?

b) What is the effective rate of interest if the loan is for 1 month?

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#### Solution Preview

1) A firm's profit margin is 10% and its asset turnover ratio is .6. It has no debt, has net income of $10 per share, and pays dividends of $4 per share. What is the sustainable growth rate?

Asset turnover ratio=0.6

Profit margin=10%

Therefore

Earnings on equity=6.00%=0.6*0.1

Earning per share=$10

Dividend=$4

Plowback ratio= ...

#### Solution Summary

Answers two questions on : 1) sustainable growth rate, 2) effective rate of interest

Finance: net income, annuity, effective interest rate, discount, ROR, NPV, Beta, EPS

1 A firm has return on equity of 20% and a total asset turnover of 4. Assuming

a debt ratio of 50% and sales of $1,000,000, calculate net income.

a. $25,000

b. $50,000

c. $75,000

d. $100,000

2 You have just won a magazine sweepstakes and have a choice of three

alternatives. You can get $100,000 now, or $10,000 per year in perpetuity, or

$50,000 now and $150,000 at the end of 10 years. If the appropriate discount

rate is 12%, which option should you choose?

a. $100,000 now

b. $10,000 perpetuity

c. $50,000 now and $150,000 in 10 years

3 Given a 360-day year, the effective annual cost of not taking advantage of the

3/10, net 30 terms offered by a supplier is:

a. 55.7%.

b. 45.4%.

c. 32.3%.

d. 28.2%.

4 Monopoly Corp. is projecting sales of $12 million next year. All sales will be

on a credit basis. The present average collection period is 45 days. Monopoly

is considering a change in selling terms from net 30 days to 2/10, net 30 in

order to speed up the collections of its receivables. Studies indicate that one

half of the firm's customers will take the discount. If Monopoly offers this

discount, how much will it cost next year? Assume a 365-day year.

a. $87,000

b. $98,000

c. $103,000

d. $112,000

e. $120,000

5 UVP preferred stock pays $5.00 in annual dividends per share. If your

required rate of return is 13%, how much will you be willing to pay for one share?

a. $38.46

b. $26.26

c. $65.46

d. $46.38

6 Determine the dollar value of a three year annuity that would produce the

same NPV as the following project if the appropriate discount rate is 15%, and

initial outflow = 0.

Initial Outflow = $1,200

Cash Flow Year 1 = $800

Cash Flow Year 2 = $500

Cash Flow Year 3 = $700

a. $250.38

b. $673.94

c. $146.28

d. $430.82

7 Sola Cola Corporation is undertaking a capital budgeting analysis. The

rate on 30-year U.S. Treasury bonds is 6.3%, and the return on the S&P 500

index is 18.5%. If the cost of Sola Cola's retained earnings is 19.7%,

calculate its beta.

a. 1.1

b. 1.3

c. 1.5

d. 1.7

8 Zybeck Corp. projects operating income of $4 million next year. The firm's

income tax rate is 40%. Zybeck presently has 750,000 shares of common

stock outstanding which have a market value of $10 per share, no preferred

stock, and no debt. The firm is considering two alternatives to finance a new

product: (a) the issuance of $6 million of 10% bonds, or (b) the issuance of

60,000 new shares of common stock. If Zybeck issues common stock this

year, what will projected EPS be next year?

a. $2.10

b. $2.96

c. $2.33

d. $1.67

9 Assume that an investor owned 5,000 of Chrysler Corporation common stock

prior to the purchase of Chrysler by Daimler-Benz of Germany. At the time

of the acquisition, the dollar was worth 1.7848 German marks. Further

assume that the purchase price was equal to 107.09 marks per share.

What was the sales price of Chrysler common stock per share in U.S.

dollars?

a. $50

b. $191

c. $107

d. $60

e. None of the above

10 Kiosk Corp. has current assets of $4.5 million and current liabilities of $3.6

million. The current ratio is 1.25, and the quick ratio is 0.75. How much

does Kiosk have invested in inventory (in millions)?

a. $0.8

b. $1.8

c. $2.4

d. $2.9

e. $3.6

11 A firm has a total asset turnover of 2, a net profit margin of 5%, and a debt

ratio of 50%. If the firm has a dividend payout ratio of 20%, calculate its

sustainable growth rate.

a. 14%

b. 16%

c. 18%

d. 20%

12 If you have $20,000 in an account earning 8% annually, what constant amount

could you withdraw each year and have nothing remaining at the end of five

years?

a. $3,525.62

b. $5,008.76

c. $3,408.88

d. $2,465.78

13 A firm has a degree of combined leverage of 1.25. Price per unit is $15 and

variable cost per unit is $5. Interest expense is $10,000 and fixed costs are

$190,000. Calculate the quantity of output produced.

a. 100,000 units

b. 120,500 units

c. 150,000 units

d. 200,000 units

14 A stock currently sells for $63 per share, and the required return on the

stock is 10%. Assuming a growth rate of 5%, calculate the stock's last

dividend paid. (Rounded)

a. $1

b. $3

c. $5

d. $7

15 An investor in the 40% tax bracket owning a tax-exempt bond yielding 6%

realizes an equivalent before-tax yield of:

a. 12%

b. 10%

c. 8%

d. 6%