Chapter 14, Problem 6CP

Scott Kelly is reviewing Master Toy’s financial statements to estimate its sustainable growth rate. Using the information presented in Table $\text{14}.\text{19}$: $\left(\text{L}0\text{ 14}-\text{3}\right)$
a. Identify and calculate the components of the DuPont formula.b. Calculate the ROE for $\text{2}0\text{19}$using the components of the DuPont formula.
c. Calculate the sustainable growth rate for $\text{2}0\text{19}$from the film’s ROE and plowback ratios.

$\text{TABLE 14}.\text{15}$ Chicago Refrigerator Inc. balance sheet as of December $\mathrm{<mn>\; 3\; </mn>\; <mn>\; 1\; </mn>}$ ($ thousand)
	$2018$	$2019$
Assets
Current assets
Case	$\$683$	$\$325$
Accounts receivable	$1,490$	$3,599$
Inventories	$1,415$	$2,423$
Prepaid expenses	$15$	$13$
Total current assets	$\$3.603$	$\$6.360$
Property, plant, equipment, net	$1,066$	$1,541$
Other	$123$	$157$
Total assets	$\$4.792$	$\$8.058$
Liabilities
Current liabilities
Notes payable to bank	$\$-$	$\$875$
Current poction of long-term debt	$38$	$115$
Accounts payable	$485$	$933$
Estimated income tax	$588$	$472$
Accrued expenses	$576$	$586$
Customer advance payment	$34$	$963$
Total current liabilities	$\$1.721$	$\$3.945$
Long-term debt	$122$	$179$
Other liabilities	$81$	$131$
Total liabilities	$\$1.924$	$\$4.255$
Shareholders’ equity
Common stock $\$1$ par value $1,000,000$ shares authorized: $550,000$ and $829,000$ outstanding, respectively	$\$550$	$\$829$
Preferred stock, Series A $10\%$ : $\$25.00$ per value; $25.000$ authorized: $20.000$ and $18.000$ outstanding respectively	$500$	$450$
Additional paid-in capital	$450$	$575$
Retained earnings	$1.368$	$1.949$
Total shareholders’ equity	$\$2.868$	$\$3.803$
Total liabilities and shareholders’ equity	$\$4.792$	$\$8.058$

$\text{TABLE 14}.\text{16}$ Chicago Refrigerator Inc. income statement, year’s ending December $\text{31}$ ($ thousand)
	$\text{2018}$	$\text{2019}$
Net sales	$\$7.570$	$\$12.065$
Other income, net	$261$	$345$
Total revenues	$\$7,831$	$\$12,410$
Cost of goods sold	$\$4,850$	$\$8,048$
General administrative and marketing expenses	$1,531$	$2,025$
Interest expense	$22$	$78$
Total costs and expenses	$\$6,403$	$\$10,151$
Net income before tax	$\$1,428$	$\$2,259$
Income tax	$628$	$994$
Net income	$\$800$	$\$1,265$

$\text{TABLE 14}.\text{17}$ Quickbrush Company financial statements: Yearly data ( $\$000$ except per-share data)
Income statement	December 2017	December 2018	December 2019
Revenue	$\$3,480$	$\$5,400$	$\$7,760$
Cost of goods sold	$2,700$	$4,270$	$6,050$
Selling general and admin expense	$500$	$690$	$1,000$
Depreciation and amortization	$30$	$40$	$50$
Operating income (EBIT)	$\$250$	$\$400$	$\$660$
Interest expense	$0$	$0$	$0$
Income before taxes	$\$250$	$\$400$	$\$660$
Income taxes	$60$	$110$	$215$
Income after taxes	$\$190$	$\$290$	$\$445$
Diluted EPS	$\$0.60$	$\$0.84$	$\$1.18$
Average shares outstanding (OOO)	$317$	$346$	$376$

Financial statistics	December 2017	December 2018	December 2019	3-year Average
COGS as % of sales	$77.59\%$	$79.07\%$	$77.96\%$	$78.24\%$
General & admin as % of sales	$14.37$	$12.78$	$12.89$	$13.16$
Operating margin (%)	$7.18$	$7.41$	$8.51$
Pretax income/EBIT (%)	$100.00$	$100.00$	$100.00$
Tax rate (%)	$24.00$	$27.50$	$32.58$

Balance sheet	December 2017	December 2018	December 2019
Cash and cash equivalents	$\$460$	$\$50$	$\$480$
Accounts receivable	$540$	$720$	$950$
Inventories	$300$	$430$	$590$
Net property, plant, and equipment	$760$	$1,830$	$3,450$
Total assets	$\$2,060$	$\$3,030$	$\$5,470$
Current liabllities	$\$860$	$\$1,110$	$\$1,750$
Total liabllities	$\$860$	$\$1,110$	$\$1,750$
Stockholders’ equity	$1,200$	$1,920$	$3,720$
Total liabllities and equity	$\$2,060$	$\$3,030$	$\$5,470$
Market price per share	$\$21.00$	$\$30.00$	$\$45.00$
Book value per share	$\$3.79$	$\$5.55$	$\$9.89$
Annual dividend per share	$\$0.00$	$\$0.00$	$\$0.00$