Question

You've collected the following information about Molino, Inc.: Sales $ 215,000 Net income $ 17,300 Dividends $ 9,400 Total debt $ 77,000 Total equity $ 59,000 a. What is the sustainable growth rate for the company? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If it does grow at this rate, how much new borrowing will take place in the coming year, assuming a constant debt-equity ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What growth rate could be supported with no outside financing at all? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

(a) 15.46%

(b) $11,904.11

(c) 6.15%

Explanation:

(a) Sustainable growth rate:

$Return\ on\ equity\ (ROE)=\frac{Net\ income}{Total\ equity}$

$Return\ on\ equity\ (ROE)=\frac{17,300}{ 59,000}$

                                                = 29.32%

Retention Ratio = 1 - Dividend Payout

                          $=1-[\frac{9,400}{17,300}]$

                                 = 45.66%

$Sustainable\ growth\ rate=\frac{(ROE\times Retention\ Ratio)}{(1-ROE\times Retention\ Ratio)}$

$Sustainable\ growth\ rate=\frac{(0.2932\times 0.4566)}{(1-0.2932\times 0.4566)}$

$=\frac{0.1338}{0.8662}$

= 0.15446

= 15.46%

(b) Additional borrowing:

New Total Asset = (Total debt + Total equity) × (1 + Sustainable growth rate)

= (77,000+59,000) × (1 + 15.46%)

= 157025.4

$New\ Debt=\frac{D}{D+E}\times New\ Total\ Asset$

$New\ Debt=\frac{77,000}{77,000+59,000}\times 157024.4$

                         = $88904.11

Increase in Borrowing = New debt - old debt

                                     = $88,904.11 - $77,000

                                     = $11,904.11

(c) Internal growth rate:

$ROA=\frac{Net\ income}{Debt+equity}$

$ROA=\frac{17,300}{77,000+59,000}\times 100$

= 12.72%

$Internal\ growth\ rate=\frac{(ROA\times Retention\ Ratio)}{(1-ROA\times Retention\ Ratio)}$

$Internal\ growth\ rate=\frac{(0.1272\times 0.4566)}{(1-0.1272\times 0.4566)}$

$=\frac{0.0580}{0.942}$

= 0.0615

= 6.15%