BUSINESS FINANCE (ACC501)

Question # 1:

The ABC Limited, a manufacturer of wood furniture, has a debt-equity ratio of 0.4, a profit margin of 4
percent, a dividend payout ratio of 50 percent and a total assets turnover of 1. You are required to
calculate the Sustainable Growth Rate.

Solution
Data:-

Debt-equity ratio = 0.4 1 + 0.4 = 1.4

Profit Margin = 4% = 0.04

Total assets turnover = 1

Dividend payout Ratio = 50%

Retention ratio (b) = 0.5

ROE = Profit Margin × Debt Equity Ratio × Total Assets Turn Over Ratio

= 0.04 × 1.4 × 1

= 0.056

ROE ×b
Sustainable Growth Rate ( g ) =
1−( ROE × b)

0.056 ×0.5
=
1−( 0.056 ×0.5)

0.028
=
0.972

= 0.0288

Question # 2:

Mr. Ali is a salaried person and wants to buy a car after 6 years. At that time, he would be required to
have an amount of Rs.700,000 for the purpose. Currently, he has Rs. 300,000to invest. He has found an
investment plan that promises him to pay Rs. 700,000 after 6years if he invests Rs. 300,000 now. You are
required to calculate the interest rate offered by the investment plan?

Solution
Future Value = Rs. 700,000

Present Value = Rs. 300,000

Time (t) = 6 years

Interest Rate (r) =?

According to Formula:-

FV = PV × (1 + r) t

700,000 = 300,000 × (1 + r) t

700,000
= (1 + r) 6
300,000

(2.3)1/6 = (1 + r)

4.096 = 1 + r

r = 4.096 – 1

r = 3.096