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Question 15.P.7: Colburn Savings Association has forecast the following perfo...

Colburn Savings Association has forecast the following performance ratios for the year ahead. How fast can Colburn allow its assets to grow without reducing its ratio of equity capital to total assets, assuming its performance holds reasonably steady over it planning period?

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Profit margin of net income
over operating revenue 17.75%
Asset utilization (operating revenue/assets) 8.25%
Equity multiplier 9.5x
Net earnings retention Ratio 45.00%

 

Internal Capital Growth Rate = Profit Margin * Asset Utilization * Equity Multiplier * Retention Ratio

 

= 0.1775 * 0.0825 * 9.5 * 0.450

 

= 0.0626 or 6.26%

 

Its assets cannot grow any faster than 6.26 percent in order to avoid reducing its ratio of equity capital to total assets.

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