Windswept, Inc. 2011 Income Statement ($ in milions) Net sales $8,450
Less: Cost of goods sold 7,240
Less: Depreciation 400
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Earnings before interest and taxes 810
Less: Interest paid 70
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Taxable Incomne $740
Less: Taxes 259
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Net income $481

Windswept, Inc 2010 and 2011 Balance Sheets ($ in mlions)

2010 2011 2010 2011
Cash $ 120 $140 Accounts payable $1,110 $1,120
Account rec. 930 780 Long-term debt 840 1,210
Inventory 1480 1520 Common Stock 3,200 3,000
--- --- --- ---
Total $2,530 $2,440 Retained Earnings 530 710
Net fixed assets 3,150 3,600

--- --- --- ---
Total assets $5,680 $6,040 Total Liabilities & equity $5,680 $6,040

2011

Equity multiplier Retention ration ROA ROE
Internal Growth Rate Sustainable Growth Rate

Calculate the above items

2011:

1. Equity multiplier = Total Assets / Stockholders' Equity

= $6,040/$3,710 = 1.628

2. Retention Ratio = Retained Earnings for the current period / Net Income = ($710 - $530)/$481 = 0.374 or 37%

3. ROA (Return on Assets): ROA = Net Income / Total Assets

= $481 /$6,040 = 0.0796 or 7.96%

4. ROE (Return on Equity) = Net Income / Average Equity

= $481 / $3,720 = 0.1293 or 12.9%

Average Equity = ($3,730 + 3,710) / 2 = $3,720

5. Internal Growth Rate = Retained Earnings / Total Assets

= $710 / $6,040 = 0.1175 or 11.75%

6. Sustainable Growth Rate = Earnings Retention Rate x Return on Equity

= 37% x 12.9% = 0.0477 or 4.77%

Explanation:

a) Windswept, Inc. 2011 Income Statement ($ in millions)

Net sales                                     $8,450

Less: Cost of goods sold              7,240

Less: Depreciation                           400

Earnings before interest and taxes 810

Less: Interest paid                             70

Taxable Income                             $740

Less: Taxes                                     259

Net income                                    $481

b) Windswept, Inc 2010 and 2011 Balance Sheets ($ in millions)

                              2010     2011                                   2010           2011

Cash                    $ 120      $140   Accounts payable $1,110       $1,120

Account rec.          930       780    Long-term debt       840         1,210

Inventory              1480     1520    Common Stock    3,200        3,000

Total                 $2,530  $2,440    Retained Earnings 530            710

Net fixed assets 3,150    3,600      Total Liabilities &

Total assets    $5,680  $6,040                    equity $5,680     $6,040

c) Equity Multiplier is a financial leverage ratio that determines the percentage of a company's assets that is financed by stockholders' equity or debt.  The formula for equity multiplier is total assets divided by stockholders' equity.

d) Retention ratio is the percentage of current period's retained earnings to the net income.  It shows how much the business has retained from income to grow the business further.  It is the opposite of the payout ratio, which measures the percentage of profit paid out to shareholders as dividends.

e) ROA (Return on Assets) measures the profitability of the business in relation to its assets.

f) ROE (Return on Equity) measures the profitability of the business in relation to its equity or net assets.

g) The internal growth rate (g) for a public company is calculated by taking the firm's retained earnings and dividing by total assets, or by using return on assets formula (net income / total assets).

h) The Sustainable growth rate is calculated by multiplying a company's earnings retention rate by its return on equity.

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