Question

QUESTION 22 Given the financial statements below for Dragonfly Enterprises, what would be the sustainable growth rate (SGR) if the company decided to change the dividend payout rate to 51.8%? Enter your answer as the nearest tenth of a percent (e.g., 12.3), but do not include the % sign. Dragonfly Enterprises Income Statement ($ Million) 2011 Sales 370 Cost of Goods Sold 226 Selling, General, & Admin Exp. 62 Depreciation 20 Earnings Before Interest & Taxes 62 Interest Expense 12 Taxable Income 50 Taxes at 40% 20 Net Income 30 Balance Sheets as of 12-31 Assets 2010 2011 Cash 10 10 Account Receivable 46 50 Inventory 43 45 Total Current Assets 99 105 Net Fixed Assets 166 195 Total Assets 265 300 Liabilities and Owners Equity 2010 2011 Accounts Payable 26 30 Notes Payable 0 0 Total Current Liabilities 26 30 Long-Term Debt 140 150 Common Stock 22 22 Retained Earnings 77 98 Total Liab. and Owners Equity 265 300

Answer 1

Sustainable Growth Rate: Sustainable Growth rate helps us to identify how much a business can grow Year on Year with current available resources.

Formulas needs to be used.

Sustainable Growth Rate Formula = Return on Equity X Business Retention Rate.

Business Retention Rate = 100% - Dividend Rate

Return On Equity= Assets Utilization rate X Profitability Rate X Financial Utilization Rate.

Assets Utilization rate = Total Sales/ Total Assets

Profitability Rate = Net Income/ Total Sales

Financial Utilization Rate = Total Debt/ Total Equity.

I have Prepare Income Statement and Balance Sheet For the year, as given below

Income Statement
COGS	226	Sales`	370
Gross Profit	144
SG&A	62	Gross Profit	144
Dep	20
Interest	12
Tax @40%	20
Net Income	30
	144		144

Balance Sheet
	2010	2011	Assets	2010	2011
Accounts Payable	26	30	Cash	10	10
Notes Payable	0	0	Accounts Receivable	46	50
Total Current Liabilities	26	30	Inventory	43	45
Long term Debt	140	150	Total Current Assets	99	105
Common stock	22	22	Fixed Assets	166	195
Retained Earnings	77	98
Total Liabilities	265	300	Total Assets	265	300

As Balance Sheet give year to date balances at the year end so we will use 2011 Balance Sheet number for Calculating Sustainable Growth rate.

Asset Utilization rate = Total Sales/Total Assets = 370/300 =1.23

Profitability Rate = Net income/ Total Sales = 30/370 = 0.081

Financial Utilization rate = Total debt/ Total Equity

Total Debt= 150

Total Equity = Common Stock+ Retained Earnings = (22+98) = 120

=150/(22+98) = 1.25

Return On Equity= Assets Utilization rate X Profitability Rate X Financial Utilization Rate.

ROE = 1.23 X 0.081 X 1.25 = 12.50%

Dividend Rate = 51.8%

Business Retention Rate = 100% -51.8% = 48.20%

Sustainable Growth rate = ROE X Business Retention Ratio = 12.50 X 48.20 = 6.03