Question

In projecting the expected growth rate for Environ for the year 2022, you had three potential growth scenarios: (a) (8 points) In the base-case scenario, Environ plans to invest an extra $24 million in new projects, compared to $62 million for existing projects. Environ's expected return on equity for 2022 is expected to adjust from the current level to the industry average of 11%. Estimate the growth rate under this scenario. (b) (8 points) In the best-case scenario, Environ plans to double its current investment level, adding an extra $62 million for new projects over and above the current $62 million for existing projects. Its return on equity will jump to 15%, outperforming the industry average of 11%. Estimate the growth rate under this scenario. (c) (8 points) In the worst-case scenario, Environ will be faced with credit constraints that curtails its ability to finance new investment. As a result, Environ decides not to reinvest. Furthermore, return on equity will remain constant at its 2021 levels. Estimate the growth rate under this scenario. Vale Stoopro 50 Nuoro shares onding in millions To Assin 5 mins 5000 Tot Deen millions Book valueMarket value) 1500 Regression Bete 1.32 Market nok premium in 23 Pisk-free Rate 0.98 Income Statement for Environ Systems for the year ending December 2021 Revenue 2021 Gross sales 281, 263 (Less sales returns and allowances) (10.000 Net Sales 271,263 2020 196 884 (7000) 189,884 Cost of Goods Sold Cost of Goods Sold Gross Profit (Loss) 130,123 123,765 141,140 66,119 Expenses Advertising Depreciation Employee benefits Research and development Salaries and wages Other Total Operating Expenses Operating Income (Loss) Non-operating revenues, expenses, gains, losses (Less interest expense) Income Before Taves (Less income tax expense) Income From Continuing Operations 12 16.616 3,458 24.165 11,243 8,123 63.617 12 16,616 3,458 26,582 10,906 7,643 65,216 903 77,523 12,762 (6.113) 84,172 (1,069) 83,103 903 903 Below-the-Line Items Income from discontinued operations Extraordinary items Cumulative effect of accounting changes Net Income 83,103 903

Answer 1

In the base-case scenario, the growth rate would be approximately 35.8%. In the best-case scenario, the growth rate would be approximately 57.5%. In the worst-case scenario, the growth rate would be 0%.

Step-by-step explanation:

In the base-case scenario, Environ plans to invest an extra $24 million in new projects and $62 million for existing projects. The expected return on equity for 2022 is expected to adjust to the industry average of 11%. To estimate the growth rate under this scenario, we can use the formula:

Growth Rate = (Investment in new projects / Equity) + (Investment in existing projects / Equity) * Return on Equity.

Plugging in the values, we get:

Growth Rate = ($24 million / ($24 million + $62 million)) + ($62 million / ($24 million + $62 million)) * 11%

= 0.279 + 0.721 * 0.11

= 0.279 + 0.079

= 0.358 or 35.8%.

In the best-case scenario, Environ plans to double its current investment level, adding an extra $62 million for new projects and $62 million for existing projects. The return on equity will be 15%, higher than the industry average. Using the same formula, we get:

Growth Rate = ($62 million / ($62 million + $62 million)) + ($62 million / ($62 million + $62 million)) * 15%

= 0.5 + 0.5 * 0.15

= 0.5 + 0.075

= 0.575 or 57.5%.

In the worst-case scenario, Environ will not reinvest due to credit constraints and the return on equity will remain constant at its 2021 levels. Therefore, the growth rate will be 0% in this scenario.