RE: Fall 98 - MC Question 18

Judy Callahan ( JCALLAHAN@trustinsurance.com )
Tue, 3 Nov 1998 08:26:22 -0500

Since the question asked for what "growth rate can the company maintain"
I used the sustainable growth rate:
Plowback * ROE and got 18.72% (twice as much as your answer). Answer E.

-----Original Message-----
From: Sarah_Kemp@heritageinsurance.com
[SMTP:Sarah_Kemp@heritageinsurance.com]
Sent: Tuesday, November 03, 1998 8:23 AM
To: tglassman@chubb.com; studygroup5b@lists.casact.org
Subject: Re: Fall 98 - MC Question 18

That is exactly the answer I got.

tglassman@chubb.com on 11/03/98 07:14:31 AM

To: studygroup5b@lists.casact.org
cc: (bcc: Sarah Kemp/PRCG/OPS/HMC)

Subject: Fall 98 - MC Question 18

Since the CAS discussion forum is slow, I'll post my question
here:

I believe the answer to question 18 is B.

Internal Growth Rate = Plowback Ratio * ROE * Equity/Assets
Plowback = (1-Div Payout) = .40
Net Income = REV-CGS-INT-TAX = 2000-1600-40-126 = 234
Equity = Assets - Outstanding Debt = 1000-500 = 500
ROE = Net Income/Equity = 234/500 = .468
Equity/Assets = 500/1000 = .5

Therefore: Internal Growth Rate = .4*.468*.5 = .0936

Please comment.