Question

Narrow Falls Lumber has total assets of $913,600, total debt of $424,500, net sales of $848,600, and net income of $94,000. The tax rate is 21 percent and the dividend payout ratio is 30 percent. What is the firm's sustainable growth rate?

Answer 1

Answer:

The firm's sustainable growth rate is 13%.

Explanation:

The firm's sustainable growth rate can be calculated using the following formula:

Sustainable growth rate = Retention Rate * Return on Equity ............. (1)

Where;

Dividend payout ratio = 30%, or 0.30

Retention rate = 1 - dividend payout ratio = 1 - 0.30 = 0.70

Shareholder's equity = Total assets - Total debt = $913,600 - $424,500 = $489,100

Return on equity = Net income / Shareholder's equity = $94,000 / $489,100 = 0.19

Substituting the relevant values into equation (1), we have:

Sustainable growth rate = 0.70 * 0.19 = 0.13, or 13%

Therefore, the firm's sustainable growth rate is 13%.