Factor One ?

The following exercises arc intended to illustrate factors 1 and 2. Company A has total assets of $5,000.000 and net income of $1,000,000. It pays 20% of its net income as dividends (meaning it adds 80% of its net income to retained earnings). Its mix of debt and equity is such that its debt to equity ratio is 1.0 (or $2.5 million in debt and $2.5 million in equity). For simplicity, assume that net income grows by the same percentage that assets grow, and that their will be no changes in current liabilities. For Factor 1: Determine how much the company can grow if the only source of financing is the amount added to retained earnings. Calculate the new debt to equity ratio that will result. Repeat '1' and '2' if (a) the company pays only 10% of its net income as dividends, and (b) the company pays 40% of its net income as dividends. For Factor 2: Choose a growth rate greater than what you found for Factor 1, question 1. a. Fund the additional funding needed (after additions to retained earnings are included) with new equity. What is the new debt to equity ratio? b. Now fund the additional funding needed entirely with new debt. What is the new debt to equity ratio? c. Determine how much new equity and new equity would need to be added to keep the new debt to equity ratio the same as the old one. Repeat 'a', 'b' and 'c' if (a) the company pays only 10% of its net income as dividends, and (b) the company pays 40% of its net income as dividends. See if you can determine how much the company can grow if it adds no new equity (but does add retained earnings) and uses only debt to make up any additional funding needed