3.1 Use the information in the following table to calculate the following ratios. Use the results to discuss and compare the financial positions of the two firms.

Ratios: Total Shareholder Return Return on Sales Return on Assets Return on Equity Asset Turnover Times Interest Earned Debt Ratio (Youll need to calculate the average debt during the year.)

Spaling Preston

EBIT (Earnings before Interest and Taxes) 300,000 190,000

Interest Expense 10,000 15,000

Net income 200,000 100,000

Dividend payout ratio 35% 40%

Retention ratio 65% 60%

Sales 3,000,000 2,000,000

Average assets during the year 2,500,000 1,500,000

Average shareholders equity during the year 1,800,000 1,000,000

Market price per share

Beginning of year 20 18

End of year 15 20

Number of shares outstanding 150,000 50,000

3.2 Assume you have put $1,000 in a savings account at 10% annually compounded interest.

a. How much could you take out each year and still have the original $1,000 in the account?

b. If you left half of the interest earnings in the account, at what rate would the balance grow from year to year?

c. If you took out 80% of the interest earnings in the account, at what rate would the balance grow each year?

3.3 Imagine a corporation with $1,000,000 of assets and a debt ratio of 40%. ROE (return on equity) is expected to be 20% for the foreseeable future. Assume the firm keeps the same amount of debt indefinitely (as opposed to keeping the same debt ratio).

a. What do you expect the firms earnings to be for the next 3 years if the firm doesnt pay out any dividends or re-purchase any shares?

b. If the firm doesnt pay any dividends or re-purchase any shares, at what rate would the firm grow from year to year?

c. If the firm pays 50% of its earnings as dividends, at what rate would the firm grow from year to year?

d. If the firm uses 80% of its earnings to re-purchase shares from its shareholders, at what rate would the firm grow from year to year?

e. If the firm pays 50% of its earnings as dividends, and uses an additional 20% of its earnings to re-purchase shares from its shareholders, at what rate would the firm grow from year to year?

f. What does the term Sustainable Growth Rate mean? Would the amounts you have calculated in parts b. to d. equal the Sustainable Growth Rate for the firm?