Question One (3 Marks) Sustainable Growth.

Nessa Corporation realized a net income of K2,000 on sales of K40,000 last year. The firm distribute K500 as dividends. It had total assets of K100,000, of which K40,000 was financed by debt.

a. What is the firms sustainable growth rate?

b. If the firm grows at its sustainable growth rate, how much debt will be issued next year?

c. What would be the maximum possible growth rate if the firm did not issue any debt next year?

Question Two (3 Marks) Sustainable Growth.

An unlevered firm perceives its optimal dividend policy to be a 40 percent payout ratio. Asset turnover is sales/assets = 80%, the profit margin is 10 percent, and the firm has a target growth rate of 5 percent.

a. Is the firms target growth rate consistent with its other goals?

b. If not, by how much does it need to increase asset turnover to achieve its goals?

c. How much would it need to increase the profit margin instead?