Answer:
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.
