WORKSHEET – CHAPTER 4

1. Gladsden Refinishers currently has $21,900 in sales and is operating at 45 percent

of the firm's capacity. What is the full capacity level of sales?

Full Capacity of Sales= Current Sales

Current Capacity Utilization

Full-capacity sales = $21,900/0.45 = $48,667

2. The Corner Store has $219,000 of sales and $187,000 of total assets. The firm is
operating at 87 percent of capacity. What is the capital intensity ratio at full capacity?

Capital Intensity Ration = Total Assets

Full Capacity of Sales

Full-capacity sales = $219,000/0.87 = $251,724.14

Capital intensity ratio = $187,000/$251,724.14 = 0.74

4. Designer's Outlet has a capital intensity ratio of 0.87 at full capacity. Currently, total
assets are $48,900 and current sales are $52,300. At what level of capacity is the firm
currently operating?

Total capacity sales = $48,900/0.87 = $56,206.90

Current capacity utilization = $52,300/$56,206.90 = 93 percent

Full Capacity of Sales= Current Sales

Current Capacity Utilization

Current Capital Utilization = Current Sales

Total Capacity Sales

1
5. Monika's Dinor is operating at 94 percent of its fixed asset capacity and has current
sales of $611,000. How much can the firm grow before any new fixed assets are needed?

Additional Growth without Additional asset bought = Full Capacity of Sales -1

Current Capacity Sales

Full-capacity sales = $611,000/0.94 = $650,000

Maximum growth without additional assets = ($650,000/$611,000) - 1 = 6.38 percent

6. Stop and Go has a 4.5 percent profit margin and a 15 percent dividend payout ratio.
The total asset turnover is 1.6 and the debt-equity ratio is 0.60. What is the sustainable rate
of growth?

Return on equity = 0.045  1.60  (1 + 0.60) = 0.1152

Sustainable growth = [0.1152  (1 - 0.15)]/{1 - [.1152  (1 - 0.15)]} = 10.85 percent

7. R. N. C., Inc. desires a sustainable growth rate of 4.5 percent while maintaining a 40
percent dividend payout ratio and a 6 percent profit margin. The company has a capital
intensity ratio of 1.23. What equity multiplier is required to achieve the company's desired
rate of growth?

0.045 = [ROE  (1 - 0.40)]/{1 - [ROE  (1 - 0.40)]}; ROE = .07177

0.07177 = 0.06  (1/1.23)  EM; EM = 1.47

8. A firm has a retention ratio of 45 percent and a sustainable growth rate of 6.2 percent.
The capital intensity ratio is 1.2 and the debt-equity ratio is 0.64. What is the profit
margin?

0.062 = [ROE  0.45]/[1 - (ROE  0.45)]; ROE = .129734

0.129734 = PM  (1/1.2)  (1 + .064); PM = 14.63 percent

ROE = Profit Margin x Total Asset Turnover x Equity Multiplier

9. Frasier Cabinets wants to maintain a growth rate of 5 percent without incurring any
additional equity financing. The firm maintains a constant debt-equity ratio of .0.55, a total
asset turnover ratio of 1.30, and a profit margin of 9.0 percent. What must the dividend
payout ratio be?

2
Return on equity = 0.09  1.30  (1 + 0.55) = 0.18135
Sustainable growth = [0.18135  b]/[1 - (0.18135  b)] = .05; b = 0.2626
Payout ratio = 1 - 0.2626 = 73.74 percent

10. Cross Town Express has sales of $132,000, net income of $12,600, total assets of
$98,000, and total equity of $45,000. The firm paid $7,560 in dividends and maintains a
constant dividend payout ratio. Currently, the firm is operating at full capacity. All costs
and assets vary directly with sales. The firm does not want to obtain any additional
external equity. At the sustainable rate of growth, how much new total debt must the firm
acquire?

Dividend payout ratio = $7,560/$12,600 = 0.60

Retention ratio = 1 - 0.60 = 0.40
Sustainable growth = [($12,600/$45,000)  0.40]/{1 - [($12,600/$45,000)  0.40]} = 0.126126
Projected total assets = $98,000  1.126126 = $110,360.35
Current debt = $98,000 - $45,000 = $53,000
Projected equity = $45,000 + ($12,600  1.126126  0.40) = $50,675.68
Net debt required = $110,360.35 - $53,000 - $50,675.68 = $6,685

11. The Two Sisters has a 9 percent return on assets and a 75 percent retention ratio. What
is the internal growth rate?

Internal growth rate = (0.09  0.75)/[1 - (0.09  0.75)] = 7.24 percent

12. The Dog House has net income of $3,450 and total equity of $8,600. The debt-equity
ratio is 0.60 and the payout ratio is 20 percent. What is the internal growth rate?

Total assets = $8,600  (1 + 0.60) = $13,760

Return on assets = $3,450/$13,760 = .250727
Internal growth = [.250727  (1 - 0.20]/[1 - (.250727  (1 - 0.20)] = 25.09 percent