The GAMA Company has the following results.
Net sales = $6,000,000
Net total assets = $4,000,000
Depreciation = $160,000
Net income = $400,000
Long-term debt = $2,000,000
Equity = $1,160,000
Dividends = 160,000
a. Compute GAMA’s ROE directly. Confirm this using the three components (DuPont Equation).
b. Using the ROE computed in Part a, what is the expected sustainable growth rate for GAMA?
c. Assuming the firm’s net profit margin (Net Income / Sales) went to 0.04, what would happen to GAMA’s Net Income and ROE?
d. Using the ROE in Part c, what is the expected sustainable growth rate? What if dividends were only $40,000?