Question

Wilkinson and Daughters has net income of $415,400, total assets of $2.2 million, and total liabilities of $1.08 million. The company paid $270,000 in dividends. What is the firm's sustainable rate of growth?

Answer 1

Answer:

The firm's sustainable rate of growth is 12.98%

Explanation:

To calculate the firm's sustainable rate of growth we need to make a few steps first.

1) According to the principles of accounting Total assets=Total liabilities+Total equity

Total equity hence=(2,200,000-1,080,000)=$1,120,000

Next, we proceed to calculate the ROE, which is ROE=Net income/equity

=(415400/1,120,000)

=0.370892857(Approx)

Next we calculate the Dividend payout ratio=Dividend/Net income

=(270,000/415400)

=0.649975926

Next we calculate the Retention ratio=1-Dividend payout ratio

=1-0.649975926

=0.350024074

Finally, with all the steps made before, we are to calculate the

Sustainable growth rate=(ROE*Retention ratio)

=(0.370892857*0.350024074)

=12.98%(Approx).