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QUESTION

Crum expects sales to grow by 25 percent in 2007 and operating costs should increase in proportion to sales.

You have been given the attached information on the Crum Company. Crum expects sales to grow by 25 percent in 2007 and operating costs should increase in proportion to sales.  Fixed assets were being operated at 70 percent of capacity in 2006, but all other assets were used to full capacity.  Underutilized fixed assets cannot be sold.  Current assets and spontaneous liabilities should increase in proportion to sales during 2007.  The company plans to finance any external funds needed as 35 percent notes payable and 65 percent common stock.  The interest rate is 8 percent and interest expense is based on the debt level at the beginning of the year (cash earns no interest income).  The dividend payout ratio will remain constant, irrespective of how many shares of stock are outstanding.  What is Crum's projected ROE?  (Ignore any financing feedback effects).Information on the Crum Company (dollars in thousands):                     2006          2007 Forecast     2007 After AFNSales               1200.00Operating Costs      975.00EBIT                 225.00Interest              18.00EBT                  207.00Taxes (35%)           72.00Net Income           135.00Dividends (60%)       81.00Add'n to R.E.         54.00Current Assets       700.00Net fixed assets     300.00Total Assets        1000.00 A/P and Accruals     125.00N/P                  225.00Common stock         150.00Retained earnings    500.00Total Liab & Equity 1000.00

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