Question

The most recent financial statements for Bello Co. are shown here: Income Statement Balance Sheet Sales $ 20,700 Current assets $ 12,060 Debt $ 16,780 Costs 14,200 Fixed assets 34,200 Equity 29,480 Taxable income $ 6,500 Total $ 46,260 Total $ 46,260 Taxes (24%) 1,560 Net income $ 4,940 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 40 percent dividend payout ratio.

Answer 1

Question : What is sustainable growth Rate

Answer:

Sustainable growth Rate = 1.69 %

Explanation:

Sustainable growth Rate = Return on Equity x Retention Rate

Where Return on Equity = Asset Utilization Rate x Profitability Rate x Financial Utilization Rate

Asset Utilization Rate= Total Sales/Total Assets

                                   = 20,700/46,260 = 0.45

Profitability Rate = Net Income/ Total Assets

                           = 4,940/46,260 = 0.11

Financial Utilization Rate = total debt/ Total equity

                                          = 16,780/ 29,480 = 0.57

Return on Equity = 0.45 x 0.11 x 0.57

                             =0.028

Retention Rate = 1- dividend pay out ratio

                         = 1-0.40

                         = 0.60

Sustainable growth Rate = 0.028 x 0.60

                                           = 1.69 %