The sustainable growth rate in 2015 and 2018. Introduction: The sustainable growth rate is calculated by return on equity and retention ratio. The growth rate is product of the ROE and retention ratio.

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Answer 1

Question

Chapter 18, Problem 5CP

A

Summary Introduction

To calculate: The sustainable growth rate in 2015 and 2018.

Introduction: The sustainable growth rate is calculated by return on equity and retention ratio. The growth rate is product of the ROE and retention ratio.

B

Summary Introduction

To explain: Affect on growth rate by changing the retention ratio and leverage.

Introduction: The sustainable growth rate of a year is directly proportional to the value of retention ratio. Hence is there is an increment in retention ratio, growth rate will also increased.

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Dillon Enterprises has the following capDillon Enterprises has the following capital structure. Debt ........................ 40% Common equity ....... 60 The after-tax cost of debt is 6 percent, and the cost of common equity (in the form of retained earnings) is 13 percent. What is the firm’s weighted average cost of capital? a. An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity. Under this new and more debt-oriented arrangement, the after-tax cost of debt is 7 percent, and the cost of common equity (in the form of retained earnings) is 15 percent. Recalculate the firm’s weighted average cost of capital. b. Which plan is optimal in terms of minimizing the weighted average cost of capital?

Compute Ke and Kn under the following circumstances: a. D1= $5, P0=$70, g=8%, F=$7 b. D1=$0.22, P0=$28, g=7%, F=2.50 c. E1 (earnings at the end of period one) = $7, payout ratio equals 40 percent, P0= $30, g=6%, F=$2,20. Note: D1 is the earnings times the payout rate. d. D0 (dividend at the beginning of the first period) = $6, growth rate for dividends and earnings (g)=7%, P0=$60, F=$3. You will need to calculate D1 (the dividend after the first period).

Terrier Company is in a 45 percent tax bracket and has a bond outstanding that yields 11 percent to maturity. a. What is Terrier's after-tax cost of debt? b. Assume that the yield on the bond goes down by 1 percentage point, and due to tax reform, the corporate tax falls to 30 percent. What is Terrier's new aftertax cost of debt? c. Has the after-tax cost of debt gone up or down from part a to part b? Explain why.

Answer 2

Question

Chapter 18, Problem 5CP

A

Summary Introduction

To calculate: The sustainable growth rate in 2015 and 2018.

Introduction: The sustainable growth rate is calculated by return on equity and retention ratio. The growth rate is product of the ROE and retention ratio.

B

Summary Introduction

To explain: Affect on growth rate by changing the retention ratio and leverage.

Introduction: The sustainable growth rate of a year is directly proportional to the value of retention ratio. Hence is there is an increment in retention ratio, growth rate will also increased.

Expert Solution & Answer

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Answer 3

Question

Chapter 18, Problem 5CP

A

Summary Introduction

To calculate: The sustainable growth rate in 2015 and 2018.

Introduction: The sustainable growth rate is calculated by return on equity and retention ratio. The growth rate is product of the ROE and retention ratio.

B

Summary Introduction

To explain: Affect on growth rate by changing the retention ratio and leverage.

Introduction: The sustainable growth rate of a year is directly proportional to the value of retention ratio. Hence is there is an increment in retention ratio, growth rate will also increased.

Expert Solution & Answer

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Check out a sample textbook solution

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Answer 4

Question

Chapter 18, Problem 5CP

A

Summary Introduction

To calculate: The sustainable growth rate in 2015 and 2018.

Introduction: The sustainable growth rate is calculated by return on equity and retention ratio. The growth rate is product of the ROE and retention ratio.

B

Summary Introduction

To explain: Affect on growth rate by changing the retention ratio and leverage.

Introduction: The sustainable growth rate of a year is directly proportional to the value of retention ratio. Hence is there is an increment in retention ratio, growth rate will also increased.

Expert Solution & Answer

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Answer 5

Chapter 18, Problem 5CP

A

Summary Introduction

To calculate: The sustainable growth rate in 2015 and 2018.

Introduction: The sustainable growth rate is calculated by return on equity and retention ratio. The growth rate is product of the ROE and retention ratio.

B

Summary Introduction

To explain: Affect on growth rate by changing the retention ratio and leverage.

Introduction: The sustainable growth rate of a year is directly proportional to the value of retention ratio. Hence is there is an increment in retention ratio, growth rate will also increased.

Answer 6

Chapter 18, Problem 5CP

A

Summary Introduction

To calculate: The sustainable growth rate in 2015 and 2018.

Introduction: The sustainable growth rate is calculated by return on equity and retention ratio. The growth rate is product of the ROE and retention ratio.

Answer 7

Chapter 18, Problem 5CP

A

Summary Introduction

To calculate: The sustainable growth rate in 2015 and 2018.

Introduction: The sustainable growth rate is calculated by return on equity and retention ratio. The growth rate is product of the ROE and retention ratio.

Answer 8

B

Summary Introduction

To explain: Affect on growth rate by changing the retention ratio and leverage.

Introduction: The sustainable growth rate of a year is directly proportional to the value of retention ratio. Hence is there is an increment in retention ratio, growth rate will also increased.

Answer 9

B

Summary Introduction

To explain: Affect on growth rate by changing the retention ratio and leverage.

Introduction: The sustainable growth rate of a year is directly proportional to the value of retention ratio. Hence is there is an increment in retention ratio, growth rate will also increased.

Answer 10

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Answer 11

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Answer 12

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Answer 13

Ch. 18 - Prob. 1PS Ch. 18 - Prob. 2PS Ch. 18 - Prob. 3PS Ch. 18 - Prob. 4PS Ch. 18 - Prob. 5PS Ch. 18 - Prob. 6PS Ch. 18 - Prob. 7PS Ch. 18 - Prob. 8PS Ch. 18 - Prob. 9PS Ch. 18 - Prob. 10PS

The sustainable growth rate in 2015 and 2018. Introduction: The sustainable growth rate is calculated by return on equity and retention ratio. The growth rate is product of the ROE and retention ratio.

Solution Summary: The author explains the sustainable growth rate of a year is directly proportional to the value of retention ratio.

Videos

To calculate: The sustainable growth rate in 2015 and 2018.

Introduction: The sustainable growth rate is calculated by return on equity and retention ratio. The growth rate is product of the ROE and retention ratio.

To explain: Affect on growth rate by changing the retention ratio and leverage.

Introduction: The sustainable growth rate of a year is directly proportional to the value of retention ratio. Hence is there is an increment in retention ratio, growth rate will also increased.

Want to see the full answer?

Chapter 18 Solutions

The sustainable growth rate in 2015 and 2018. Introduction: The sustainable growth rate is calculated by return on equity and retention ratio. The growth rate is product of the ROE and retention ratio.

Solution Summary: The author explains the sustainable growth rate of a year is directly proportional to the value of retention ratio.

Videos

To calculate: The sustainable growth rate in 2015 and 2018. Introduction: The sustainable growth rate is calculated by return on equity and retention ratio. The growth rate is product of the ROE and retention ratio.

To explain: Affect on growth rate by changing the retention ratio and leverage. Introduction: The sustainable growth rate of a year is directly proportional to the value of retention ratio. Hence is there is an increment in retention ratio, growth rate will also increased.

Want to see the full answer?

Chapter 18 Solutions

To calculate: The sustainable growth rate in 2015 and 2018.

Introduction: The sustainable growth rate is calculated by return on equity and retention ratio. The growth rate is product of the ROE and retention ratio.

To explain: Affect on growth rate by changing the retention ratio and leverage.

Introduction: The sustainable growth rate of a year is directly proportional to the value of retention ratio. Hence is there is an increment in retention ratio, growth rate will also increased.