Question

1. Use the following financial statements for the XYZ Corporation: What is the Sustainable Growth Rate for the XYZ Corporation in 2015?

                        Income Statement

	2015
Sales	$3,000,000
Cost of Goods Sold	2,000,000

Depreciation	300,000
EBIT	700,000
Interest	200,000
Taxable Income	500,000
Taxes (40%)	200,000
Net Income	$300,000

Dividends	$150,000
Add. to Retained Earnings	$150,000

Balance Sheet

Assets				Liabilities & Owner's Equity
	2014	2015				2014	2015
Cash	$160,000	$190,000			Accounts Payable	$310,000	$330,000
Accounts Receiv.	400,000	450,000			Notes Payable	270,000	270,000
Inventory	320,000	360,000			Current Liabilities	580,000	$600,000
Current Assets	880,000	1,000,000
					Long-term Debt	1,750,000	2,000,000
Net Fixed Assets	2,700,000	3,000,000			Total Liabilities	2,330,000	2,600,000
					Common Stock	1,000,000	1,000,000
					Retained Earnings	250,000	400,000
					Total Owner's Equity	1,250,000	1,400,000
Total Assets	$3,580,000	$4,000,000			Total	$3,580,000	$4,000,000

Answer 1

Sustainable Growth Rate = ROE (1-DPR) Where, ROE Return on Equity DPR Dividend Payout Ratio Return on Equity ROE = Net Income or Net Income Average Shareholder Equity Common Stock + Retained Earnings $300,000 ($1250000+14000000/2) $300,000 = 0.226 1325000 Dividend Payout Ratio DPR= Earnings after dividend Total Earnings $150,000 = 0.5 $300,000 So, Sustainable Growth Rate =ROE (1-DPR) = 0.226 (1-0.5)                                       0.113 or 11.3%
Alternative Solution Sustainable Growth Rate = Earnings after dividend x Earnings Earnings Beginning Stockholder equity = 150000 x 300000 300000 1325000 0.5 x                  0.226 =                  0.113 or 11.32%