10. Application Exercise, Vertical Module
Financial leverage, operating profitability and growth financing
A firm has invested 400 in capital employed and generate sales of 500 for an operating income (EBIT) of 80.
Its financial strategy consists in no debt and 100% equity financing.
Profits are taxed at 40%, the firm distributes half of its profits and ambitions growing in the future at the annual rate of 10%.
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Question 1 of 7
1. Question
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Net earnings = EBIT – interest expenses (but no debt…) – taxes
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Question 2 of 7
2. Question
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ROE = net earnings / equity, it’s the return attributable to shareholders
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Question 3 of 7
3. Question
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Question 4 of 7
4. Question
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If CE growth is greater than sustainable growth, then…
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Question 5 of 7
5. Question
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Question 6 of 7
6. Question
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If CE growth is greater than sustainable growth, then…
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Question 7 of 7
7. Question
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You have to calculate ‘d’ (pay-out) so that 10% = ROE * (1 – d)