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1. A company with $80 million in assets and $10 million in net income is planning to grow its assets by 15% and its net

1. A company with $80 million in assets and $10 million in net income is planning to grow its assets by 15% and its net income by only 12%. How much external financing will it need if its retention ratio is:

a. 30%

b. 40%

2. A company with $150 million in assets and $15 million in net income has a debt to equity ratio of 1.00. It is planning on growing its assets and net income by 15% while maintaining its debt to equity ratio. Its retention ratio is 40%. a. What will be the new level of total equity? b. What will be the new level of total debt? c. How much will be added to total equity from additions to retained earnings? d. How much will the common stock part of Owners Equity have to change?

3. Repeat question 2 but increase the retention ratio to 50%. How have the answers to a through d changed?

4. Go back to question 1 and a 30% retention ratio. What will happen to the debt to equity ratio if:

a. All funding is done through equity;

b. All funding (other than additions to retained earnings) is done through debt.

5. Two companies, A and B, have the same level of assets, net income and retention ratios and are planning to grow both assets and net income by 20%. Yet after the increase in assets and net income, Company As debt to equity ratio is smaller than Company Bs. Explain how this can happen.

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