Question

The most recent financial statements for Live Co. are shown here: Income Statement Balance Sheet Sales $12,000 Current assets $25,876 Debt $25,502 Costs 7,200 Fixed assets 18,106 Equity 18,480 Taxable income $4,800 Total $43,982 Total $43,982 Taxes (34%) 1,632 Net income $3,168 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 40 percent dividend payout ratio. No external equity financing is possible. Required: What is the sustainable growth rate

Answer 1

Answer:

11.46%

Explanation:

The computation of the sustainable growth rate is shown below:-

Return on equity = $3,168 ÷ $18,480

= 17.14%

Retention ratio = 60%

Sustanble growth rate = Return on equity × Retention ratio ÷ (1 - Return on equity × Retention ratio)

= 17.14 × 0.60 ÷ (1 - 17.14% × 0.60)

= 11.46283829 %

or

= 11.46%

So, for computing the sustainable growth rate we simply applied the above formula.