This statement is incorrect and shows a basic misunderstanding of the chapter discussion. A correct statement would be:

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1 Managing Growth/1 Question_1: To what extent do you agree or disagree with the following statement? "An important top-management job is to make certain their company's actual growth rate and sustainable growth rate are as close together as possible." ANSWER: This statement is incorrect and shows a basic misunderstanding of the chapter discussion. A correct statement would be: "An important top- management job is to anticipate differences between their company's actual and sustainable growth rates and to have a plan in place to prudently manage these differences." Constraining a rapidly growing company's actual growth rate to approximate its sustainable rate, risks needlessly sacrificing valuable growth, while boosting the growth rate of a slow-growing business, risks promoting value-destroying growth. Question_2: This chapter distinguishes between good and bad growth. How do they differ and why does the distinction matter? Quoting from the chapter, Good growth occurs when the company invests in activities offering returns in excess of cost, including the cost of capital employed. Good growth benefits owners and is rewarded by a higher stock price and reduced threat of takeover. Bad growth involves investing in activities with returns at or below cost a bad growth strategy wastes valuable resources and stock markets are increasingly adept at distinguishing between good and bad growth, and punishing the latter. Question_3: Are the following statements true or false? Please explain why. a. The only way a company can grow at a rate above its current sustainable growth rate is by issuing new stock. False. There are many other channels to achieve growth above sustainable rate! In addition to issuing new equity, companies can grow at rates above their current sustainable rate by increasing any of the four ratios comprising the sustainable growth rate: their profit margin, asset turnover, financial leverage, or retention ratio. The problem is that there are limits to a company's ability to increase these ratios.

2 Managing Growth/2 b. The stock market is a ready source of new capital when a company is incurring heavy losses. False! Not really! It is usually not easy to raise equity capital! Glamorous companies such as Tweeter or LinkedIn with an exciting story to tell can raise equity despite operating losses. More traditional companies have much more difficulty. c. Share Repurchases usually increase earnings per share. Correct! Repurchases reduce the number of shares outstanding, which contributes to increasing earnings per share. At the same time, the money used to repurchase the shares has a cost, which reduces earnings and tends to reduce earnings per share. In most instances, the former offsets the latter and earnings per share rise when shares are repurchased. d. Companies often buy back their stock because managers believe the shares are undervalued! Correct! Survey evidence suggests that most managers, most of the time, believe their shares are undervalued. Behavioralists attribute this to overconfidence and optimism of CEOs. Repurchasing under-valued stock is a productive use of company resources benefiting remaining shareholders e. Only rapidly growing firms have growth management problems. False! A major theme of this chapter has been that slow-growth companies have subtle and often more serious growth management problems than their rapidly growing counterparts f. Increasing growth increases stock price. False! Not always! Good growth yielding returns above cost increases stock price (i.e. when ROIC>Cost of Capital Employed or ROE>cost of equity). Bad growth at returns below cost destroys value and will reduce the stock price sooner or later. Question_4: Table 3.1 in the last chapter presents R&E Supplies's financial statements for the period 2008-through 2011, and Table 3.5 presents a pro forma financial forecast for Use the information in these tables to answer the following questions: a. Calculate R&E Supplies' sustainable growth rate in each year from 2009 through 2012: Profit Margin 3.30% 2.89% 2.38% 1.41% 0.91% Retention Ratio Asset Turnover Financial Leverage NA Sustainable Growth Rate NA 16.68% 13.76% 9.19% 6.76% Actual Growth Rate 23.00% 17.00% 28.00% 25.00%

3 Managing Growth/3 b. Comparing the company's sustainable growth rate with its actual and projected growth rates in sales over these years; what growth management problems does R&E Supplies appear to face in this period? R&E's actual growth rate is well in excess of its sustainable growth rate. Its growth management problems clearly involve managing the rapid growth: coming up with the money to finance the growth, or otherwise taming the rate of growth. How did the company cope with these problems? Do you see any difficulties with the way it addressed its growth problems over this period? If so, what are they? R&E has coped with its growth problems quite poorly. The profit margin has fallen, contributing to a sizable reduction in sustainable growth. Dividends continue to consume half of earnings, and asset turnover has held constant. The company has essentially financed its rapid growth by increasing financial leverage, first borrowing from suppliers now trying to borrow from the bank. If it doesn't do something quickly, it will hit its debt capacity and could find itself in real trouble. It could grow broke. d. What advice would you offer management regarding managing future growth? There are several possibilities. First, I would work hard to get the profit margin back up to a reasonable level. This might involve raising prices. Second, I would prune out all slow moving inventory and slow paying customers. Third, I would cut or eliminate the dividend. Fourth, I would go to the bank with a pro forma forecast demonstrating that these changes will result in reasonable debt ratios going forward. If this failed, I would look for another lender, or failing that a partner or buyer. Question 5: Looking at the following figure 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? New Net Equity Issues

4 Managing Growth/4 In most years since 1985, net equity issuance has been negative, meaning U.S. corporations have retired more shares measured in terms of value than they have issued. In aggregate then, new equity has been a use of capital to U.S. corporations, not a source. (At the same time, a different chart illustrates that new equity has been an important source to a certain subset of companies characterized primarily by high growth.) Looking at the following figure, describe the trend in gross public equity issues and IPOs in the U.S. during the last 30 years. How do you explain this trend given what we observe in Figure in the previous question? There is an upward trend in gross public equity issues for U.S. corporations in the last 30 years, with the exception of the recent sharp recession. This is not necessarily a contradiction to the figure in the previous question. The figure above shows that U.S. companies are issuing more equity today than they did 30 years ago. Previous figure shows that despite this pattern, U.S. companies are retiring more equity than they are issuing, and this difference is growing. This is a testament to the dynamism of the U.S. economy. The updates charts below suggests that while gross equity issues have been increasing since 2011, the same is true for repurchases as well, In 2013 total gross equity issues were $300bn; in contrast repurchases reached to $433bn. As in the pre-crisis period, in aggregate equity is use of funds for US companies once again.

5 Managing Growth/5 US Equity Issues IPOs and Seasoned Issues as well as Preferred Shares Total Gross Equity Issues True IPOs Quarterly Share Repurchases: Biosite Inc. is a developer, manufacturer, and marketer of medical diagnostic products in-san Diego, California. If you wanted to test for parasites, drug abuse, or congestive heart failure, you would be wise to contact Biosite. Following are selected financial data for the company for the period : Profit Margin Retention Ratio Asset Turnover Assets (end of year) Equity (end of year) Growth Rate in Sales 25.80% 19.40% 60.30% 64.80% 41.30%

6 Managing Growth/6 Calculate Biosite s sustainable growth rate from 2001 to Profit Margin Retention Ratio Asset Turnover Assets (end of year) Equity (end of year) Growth Rate in Sales 25.80% 19.40% 60.30% 64.80% 41.30% Sustainable Growth Rate NA 9.29% 14.68% 22.95% 26.95% For example, in 2001 g* = (10.3%) * (100%) * (0.64) *( $102.7/$72.9)=9.3% Comparing company s sustainable growth rate and its actual growth rate, discuss what growth management problems Biosite faced during this period. Biosite's actual growth rate in every year exceeded its sustainable growth rate by a wide margin. The company was growing at a rate well above its sustainable growth rate. Its challenge was how to manage this growth without growing broke. How did company cope with these problems? Biosite increased every ratio except its retention ratio (which was already at 100%). Had Biosite not improved its operating performance, as reflected in profit margin and asset turnover, the financial leverage required to generate the company's sustainable growth rate would have been almost twice as high as observed. Question-8: 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 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 Profit margin(%) Retention ratio(%) Asset turnover (X) Financial leverage (X) Growth rate in sales(%) a. Calculate Genentech's annual sustainable growth rate for the years

7 Managing Growth/ Profit margin(%) Retention ratio(%) Asset turnover (X) Financial leverage (X) Growth rate in sales(%) Sustainable Growth Rate 11% 12% 19% 29% 29% b. Did Genentech face a growth management challenge during this period? Please explain briefly. Genentech s challenge over this period was to manage its rapid growth rate. Actual growth exceeded sustainable growth by a significant margin in each of the first four years. After increasing its sustainable growth rate every year, sustainable growth and actual growth were similar in c. How did Genentech cope with this challenge? The company increased every ratio in almost every year except the retention ratio, which was already at its maximum. Comparing 2003 to 2007, Genentech s profit margin, asset turnover and financial leverage rose 39 percent, 63 percent, and 22 percent, respectively. d. Calculate Genentech sustainable growth rate in 2007 assuming an asset turnover of 0.72 times. Calculate the sustainable growth rate in 2007 assuming a financial leverage of 2.20 times. Calculate the sustainable growth rate in 2007 assuming both of these changes occur. We can answer these what if questions by substituting the assumed ratio value for the actual value in 2007, Genentech s revised sustainable growth rates are as follows: Asset turnover = 0.72 times Sustainable growth = 34.0% Financial leverage = 2.2 times Sustainable growth = 32.2% Both changes occur Sustainable growth = 37.4% Question-9: Harley Davidson, Inc., the iconic motorcycle company, has the following ratios for the years 2000 through 2004: Profit margin (%) Retention ratio (%) , Asset turnover (x) Assets (end of year, millions) $2,436 $3.12 $3,861 $4,923 $5,483 Equity (end of year, millions) $1,406 $1,756 $2,233 $2,958 $3,219 Growth rate in sales (%) Calculate Harley Davidson's annual sustainable growth rate from 2001 through 2004.

8 Managing Growth/ Profit margin(%) Retention ratio(%) Asset turnover (X) Assets (end of year, millions) $2,436 $3, $3,861 $4,923 $5,483 Equity (end of year, millions) $1,406 $1,756 $2,233 $2,958 $3,219 Growth rate in sales (%) Sustainable Growth Rate NA 28.58% 30.58% 31.51% 26.00% Did Harley Davidson have a growth problem in these years? Harley-Davidson does have a sustainable growth problem. Its actual growth rate is much lower than its sustainable growth rate. How did Harley Davidson cope with these problems? The decreases in asset turnover, retention ratio, and financial leverage are helping to decrease the sustainable growth rate. But, the spread between the two rates is still substantial in 2004