Question

You’ve collected the following information about Molino, Inc.:

Sales		$	215,000
Net income		$	14,600
Dividends		$	9,300
Total debt		$	86,000
Total equity		$	65,000

a.	What is the sustainable growth rate for the company? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b.	If it does grow at this rate, how much new borrowing will take place in the coming year, assuming a constant debt-equity ratio?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
c.	What growth rate could be supported with no outside financing at all? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

a.Return on equity = Net income / Equity

= $14,600 / $65,000

= 0.2246*100

= 22.46%

Retention ratio = 1 - ($9,300 / $14,600)

= 1 - 0.6370

= 0.3630

Sustainable growth rate = (ROE*Retention ratio) / 1 - (ROE*Retention ratio)

= ( 0.2246*0.3630)/ 1 - ( 0.2246*0.3630)

= 0.0815 / 1 - 0.0815

= 0.0815 / 0.9185

= 0.0887*100

= 8.87%.

b.New total assets = (Total debt + Total equity) *(1 + g)

= ($86,000 + $65,000)*(1 + 0.0887)

= $151,000*1.0887

= $164,393.70.

New debt = $164,393.70*$86,000 / ($86,000 + $65,000)

= $164,393.70*$86,000 / $151,000

= $164,393.70*0.5695

= $93,627.80.

Increase in borrowing = $93,627.80 - $86,000

  = 7,627.80.

c.ROA = $14,600 / ($86,000 + $65,000)

= $14,600 / $151,000

= 0.0967*100

= 9.67%

Growth rate = (0.0967* 0.3630) / 1 -0.0967*0.3630)

= 0.0351 / 1 - 0.3630

= 0.0351 / 0.6370

= 0.0551*100

= 5.51%.