Question

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

Sales $ 245,000

Net income $ 15,800

Dividends $ 9,900

Total debt $ 98,000

Total equity $ 71,000

What is the sustainable growth rate for the company? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Sustainable growth rate %

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. Round your answer to 2 decimal places, e.g., 32.16.)

Additional borrowing $

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

Internal growth rate %

Answer 1

a.

Net Income = $15,800

Dividend payment =$9,900

Addition to retained earnings = $15,800 - $9,900

                                                = $5,900

Retention Ratio = $5,900 / $15,800

                          = 37.34%

Retention ratio of company is 37.34%.

Return on equity = Net Income / total equity

                            = $15,800 / $71,000

                            = 22.25%

Return on equity is 22.25%.

Sustainable Growth rate is calculated below using following formula:

Sustainable Growth rate = Retention ratio × return on equity

                                        = 37.34% × 22.25%

                                        = 8.31%

Hence, Sustainable Growth rate is 8.31%.

b.

Total Assets = $71,000 + $98,000

                     = $169,000

Total assets of company is $169,000.

External finance needed = (Growth rate × Total Assets) - Addition to retained earnings

= (8.31% × $169,000) - $5,900

= $14,043.66 - $5,900

= $8,143.66

External Finance needed is $8,143.66.

c.

Growth rate without external financing = Addition to retained earnings / Total assets

= $5,900 / $169,000

= 3.49%

Growth rate without external financing is 3.49%.