Question

In: Finance

27. Determine a venture’s sustainable growth rate based on the following information: sales = $1,000,000; net...

27. Determine a venture’s sustainable growth rate based on the following information: sales = $1,000,000; net income = $150,000; common equity at the end of last year = $520,000; and the dividend payout percentage = 20%.

                        a.   10%

                        b.   16%

                        c.   20%

                        d. 24%

                        e.   30%

Solutions

Expert Solution

correct option is "e" -30%

Retention ratio(b) = 1-dividendpayout ratio

                   = 1-.20

                  = .80

Return on equity (ROE) =Net income /equity

            = 150000/520000

                = .28846

Sustainable growth rate =[ROE*b]/[1-(ROE*b)]

                =[.28846*.80]/[1-(.28846*.80)]

                = .2308/[1-.2308]

                 = .2308 /.7692

                = .30 or 30%


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