Question

The most recent financial statements for Live Co. are shown here: Income Statement Sales $15752 Costs $11206 Taxable Income ? Taxes (40%) ? Net Income ? Balance Sheet Current Asset $13516 Debt $16391 Fixed Asset $25944 Equity ? Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 20 percent dividend payout ratio. No external financing is possible. What is the sustainable growth rate (in %)?

Answer 1

Income statement
Sales	$15,752
Cost	$11,206
Taxable income	$4,546
Taxes 40%	$1,818
Net Income	$2,728
Balance sheet
Debt	$16,391	Current assets	$13,516
Equity (Bal. fig)	$23,069	Fixed assets	$25,944
Total	$39460	Total	$39,460
To calculate sustainable growth rate we first need to calculate the ROE, which
Return on equity      =   Net income /Total equity
Return on equity   =     $2728/$23069
Return on equity    =   0.118237   or 11.8237

The plow back ratio , b,one minus the payout ratio, so
b= 1-.020 b = 0.80
Now we can use the sustainable growth rate equation to get
Sustainable growth rate   = (ROE x b) / [1- (ROE x b)]
[0.118237 x 0.80] /[1- (0.118237 x 0.80)]
0.104472     or   10.4472