Question

1.A firm has a ROE of 16.875%, asset turnover of 2.5, and an equity multiplier of 1.5. If the firm has sales revenue of $10000, what is its net income? Net income is $450

2.A firm has cash flow from assets of $200, cash flow to creditors of $125, and $15 of net equity raised. Calculate the amount of dividends paid to shareholders. Dividends paid : $90

3.What is the firm’s sustainable growth rate? I got 13.5% for sustainable growth rate but I don't know why it is wrong please help

Answer 1

Answer to Part 1.

Assets Turnover = Sales / Total Assets
2.50 = $10,000 / Total Assets
Total Assets = $4,000

Equity Multiplier = Total Assets / Total Equity
1.50 = $4,000 / Total Equity
Total Equity = $2,667

Return on Equity (ROE) = Net Income / Total Equity * 100
16.875 = Net Income / $2,667 * 100
Net Income = $450

Answer to Part 2.

Cash Flow from Assets = Cash Flow to Creditors + Cash flow to Stockholders
$200 = $125 + Cash flow to Stockholders
Cash flow to Stockholders = $75

Cash flow to Stockholders = Dividend Paid - Net Net Borrowings
$75 = Dividend Paid - $15
Dividend Paid = $90

Answer to Part 3.

Retention ratio,b = 1 - Dividend Payout Ratio
Dividend Payout Ratio = Dividend Paid / Net Income * 100
Dividend Payout Ratio = $90 / $450 * 100
Dividend Payout Ratio = 20%

Retention ratio,b = 1 - 0.20 = 0.80

Sustainable Growth Rate = ROE * b / [1 - (ROE * b)]
Sustainable Growth Rate = (0.16875 * 0.80) / [ 1 - (0.16875 * 0.80)]
Sustainable Growth Rate = 0.1350 / [1 - 0.1350]
Sustainable Growth Rate = 0.1350 / 0.8650
Sustainable Growth Rate = 15.61%