Question

The most recent financial statements for Live Co. are shown here: Income Statement Balance Sheet Sales $14,000 Current assets $30,188 Debt $29,753 Costs 8,400 Fixed assets 21,125 Equity 21,560 Taxable income $5,600 Total $51,313 Total $51,313 Taxes (35%) 1,960 Net income $3,640 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 16 percent dividend payout ratio. No external equity financing is possible.Required:What is the sustainable growth rate?

Answer 1

Answer:

The sustainable growth rate is 16.52%

Explanation:

To compute the substantial growth rate, first, we have to calculate the retention ratio. The formula to compute the retention ratio is shown below:

= 1 – payout ratio

= 1 – 0.16

=0.84 or 84%

Now, we use the formula of substantial growth rate which is shown below:

= (Return on equity × retention ratio) ÷ { 1 -  (Return on equity × retention ratio)}

where,

Return on equity = (Net income ÷ total equity) × 100

                            = ($3,640 ÷ $21,560) × 100

                            = 16.88%

= (16.88% × 84%) ÷ ( 1 -  16.88% × 84%)

= 0.141792 ÷ (1 -  0.141792 )

= 0.141792  ÷ 0.858208

= 0.1652 or 16.52%