Bio Plasma Corp. is growing at 30% per year. It is all equity financed and has total assets of $1 million. Its return on equity is 20%. Its plowback ratio is 40%.
a. What is the internal growth rate?
b. What is the firm’s need for external financing this year?
|
Income Statement |
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|
Sales |
$950 |
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|
Costs |
250 |
||||
|
Pretax income |
700 |
||||
|
Taxes (at 28.6%) |
200 |
||||
|
Net income |
$500 |
||||
|
Balance Sheet, Year end |
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|
2011 |
2010 |
2011 |
2010 |
||
|
Debt |
$1,000 |
$900 |
|||
|
Assets |
$3,000 |
$2,700 |
Equity |
2,000 |
1,800 |
|
Total |
$3,000 |
$2,700 |
Total |
$3,000 |
$2,700 |
c. By how much would the firm increase its internal growth rate if it reduced its payout rate to zero?
d. By how much would such a move reduce the need for external financing? What do you conclude about the relationship between dividend policy and requirements for external financing?