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3. Are the following statements true or false? Please explain why.
- The only way a company can grow at a rate above its current sustainable growth rate is by issuing new stock?
- The stock market is a ready source of new capital when a company is incurring heavy losses?
- Share repurchases usually increase earnings per share.
- Companies often buy back their stock because managers believe the shares are undervalued.
- Only rapidly growing firms have growth management problems.
5. Increase growth increases stock prices. Look at Figure 4.5, describe the trend in net equity financing in the U.S. during the last 30 years. What does this say about the use of equity financing in U.S. corporations?
- Genentech Inc. is a California-based biotech pioneer recently acquired by Swiss pharmaceutical giant Roche Holding AG. Roche paid $46.8 billion in cash for the 44 percent of Genentech it did not already own, implying a market value of over $100 billion for the entire company. For a look at Genentech’s recent sustainable growth challenges, consider the following selected financial data.
| 2003 | 2004 | 2005 | 2006 | 2007 | |
|
Profit margin (%) |
17.0 |
17.0 |
19.3 |
22.8 |
23.6 |
|
Retention ratio (%) |
100.0 |
100.0 |
100.0 |
100.0 |
100.0 |
|
Asset turnover (X) |
0.38 |
0.49 |
0.55 |
0.63 |
0.32 |
|
Financial leverage (X) |
1.64 |
1.44 |
1.79 |
1.99 |
2.00 |
|
Growth rate in sales (%) |
26.1 |
40.0 |
43.5 |
40.0 |
26.3 |
- Calculate Genentech’s annual sustainable growth rate for the year 2003-2007
- Did Genentech face a growth management challenge during this period?
- How did Genentech cope with this challenge
- Calculate Genentech’s sustainable growth rate in 2007 assuming an asset turnover of 0.72 times
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