Question

The most recent financial statements for Live Co. are shown here:

Income Statement		Balance Sheet
Sales	$11,000	Current assets	$23,719	Debt	$23,377
Costs	6,600	Fixed assets	16,598	Equity	16,940
Taxable income	$4,400	Total	$40,317	Total	$40,317
Taxes (34%)	1,496
Net income	$2,904

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 26 percent dividend payout ratio. No external equity financing is possible.

Required:

What is the sustainable growth rate? (Do not round your intermediate calculations.)

rev: 09_17_2012

Multiple Choice

• 14.53 %

• 5.63 %

• 15.03 %

• 4.67 %

• 14.03 %

Answer 1

Given,

Net income = $2904

Equity = $16940

Dividend payout ratio = 26% or 0.26

Solution :-

ROE = Net income/equity

= $2904/$16940 = 0.17142857

Plowback ratio = 1 - dividend payout ratio

= 1 - 0.26 = 0.74

Now,

Sustainable growth rate = [ROE x plowback ratio]/[1 - (ROE x plowback ratio)]

= [0.17142857 x 0.74]/[1 - (0.17142857 x 0.74)]

= 0.1268571418/[1 - 0.1268571418]

= 0.1268571418/0.8731428582 = 0.1453 or 14.53%