Question

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Gilmore, Inc., had equity of $155,000 at the beginning of the year. At the end of...

Gilmore, Inc., had equity of $155,000 at the beginning of the year. At the end of the year, the company had total assets of $310,000. During the year, the company sold no new equity. Net income for the year was $33,000 and dividends were $4,200.

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.	What is the sustainable growth rate if you use the formula ROE × b and beginning of period equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
c.	What is the sustainable growth rate if you use end of period equity in this formula? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)


a.	Sustainable growth rate	%
b.	ROE × b (using beginning of period equity)	%
c.	ROE × b (using end of period equity)	%

Solutions

Expert Solution

a. The growth rate is computed as shown below:

= (ROE x b) / (1 - ROE x b)

ROE is computed as follows:

= Net income / Equity

Equity is computed as follows:

= Beginning equity + Net income - dividend

= $ 155,000 + $ 33,000 - $ 4,200

= $ 183,800

So, the ROE will be as follows:

= Net income / Equity

= $ 33,000 / $ 183,800

= 0.179542982

b is computed as follows:

= 1 - dividend / Net income

= 1 - $ 4,200 / $ 33,000

= 0.872727273

So, the growth rate will be as follows:

= (0.179542982 x 0.872727273) / (1 - 0.179542982 x 0.872727273)

= 0.156692057 / 0.843307943

= 18.58% Approximately

b. growth rate is computed as follows:

= ROE x b

ROE is computed as follows:

= Net income / Equity

= $ 33,000 / $ 155,000

= 0.212903226

b is computed as follows:

= 1 - dividend / Net income

= 1 - $ 4,200 / $ 33,000

= 0.872727273

So, the growth rate will be as follows:

= 0.212903226 x 0.872727273

= 18.58% Approximately

c. growth rate is computed as follows:

= ROE x b

ROE is computed as follows:

= Net income / Equity

Equity is computed as follows:

= Beginning equity + Net income - dividend

= $ 155,000 + $ 33,000 - $ 4,200

= $ 183,800

So, the ROE will be as follows:

= Net income / Equity

= $ 33,000 / $ 183,800

= 0.179542982

b is computed as follows:

= 1 - dividend / Net income

= 1 - $ 4,200 / $ 33,000

= 0.872727273

So, the growth rate will be as follows:

= 0.179542982 x 0.872727273

= 15.67% Approximately

Feel free to ask in case of any query relating to this question

jeff jeffy answered 2 years ago

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