Question

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

Sales		$	180,000
Net income		$	13,200
Dividends		$	8,600
Total debt		$	72,000
Total equity		$	58,000

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

What is the sustainable growth rate for the company?

b = 1 – $8,600 / $13,200
b = .3485

And the ROE is:
ROE = $13200/ 58,000
ROE = 22.76%
sustainable growth rate is:
Sustainable growth rate = (ROE × b) / [1 – (ROE × b)]

Sustainable growth rate = [22.76%(.3485)] / [1 – 22.76%(.3485)]

Sustainable growth rate = 8.61%

if it does grow at this rate, how much new borrowing will take place in the coming year, assuming a constant debt-equity ratio?

New Total Asset= 1.861*($72000 + 58,000) = $141198.50

New TD = [D / (D + E)](TA)
New TD = [$72,000 / ($72,000 + 58,000)]($141198.50)
New TD = $78202.25
And the additional borrowing will be:
Additional borrowing = $78202.25 – 72000
Additional borrowing = $6202.25

What growth rate could be supported with no outside financing at all?

ROA = $13,200 / ($72,000 + 58,000)
ROA = 10.15%
This means the internal growth rate is:
Internal growth rate = (ROA × b) / [1 – (ROA × b)]
Internal growth rate = [10.15%(.3485)] / [1 – 10.15%(.3485)]
Internal growth rate = 3.67%