A is the target growth rate consistent with firms financing

Question

Q1. Anaconda Inc. has decided against borrowing and to have all its assets financed by equity. Further, it intends to keep its payout ratio at 40%. Its asset turnover ratio is 0.9, its profit margin is 8% and its profits are taxed at 40%. The firm's target growth rate is 5%.

A) Is the target growth rate consistent with firm's financing policy?

B) If not, how much does it need to increase the asset turnover ratio or profit margin to meet the target growth rate?

C) Explain what happens if Anaconda Inc. cannot close the gap between its sustainable growth rate and target growth rate. 

Q2. Based on the following balance sheet and income statement, calculate the free cash flows generated by Magna as of end of December 31, 2010. When you calculate free cash flows please use actual taxes paid by Magna rather than using a short cut. 

Magna Fax, Inc,

Income Statement for the Year ending December 31st, 2010

Sales Revenue				$150,000
Cost of Goods Sold				$117,500
Gross Profits				$32,500
	Selling Expenses		$4,500
	General and Admin. Expenses		$4,000
	Depreciation Expense		$4,000
Operating Profits				$20,000
Interest Expense				$2,500
Net Profit before Taxes				$17,500
Taxes (40%)				$7,000
Net Profit after Taxes				$10,500

Magna Fax, Inc., Balance Sheet

For the Years Ended December 31, 2009 and 2010

				2010			2009
Assets
Cash				$24,000			$21,000
Accounts Receivable				$45,000			$39,000
Inventory				$30,000			$27,000
	Gross fixed Assets		$42,000			$40,000
	Acc. Depreciation		$22,000			$18,000
Net fixed assets				$20,000			$22,000
Total Assets
Liabilities and Equity
Accounts Payable				$25,000			$30,000
Notes Payable				$50,000			$40,000
Accruals				$1,000			$2,000
Long-term Debts				$10,000			$8,000
Common Stock at par				$1,000			$1,000
Paid-in Capital in excess of par				$4,000			$4,000
Retained Earnings				$28,000			$24,000
Total Liabilities and Equity				$119,000			$109,000