Question

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 30 percent dividend payout ratio. What is the sustainable growth rate?

Answer 1

$\bf {Income \: Statement}$

Sales $17,900

Costs 11,900

Taxable income $6,000

Taxes (40%) 2,400

Net income $3,600

Balance Sheet

Current assets $11,600

Debt $16,100

Fixed assets 28,000

Equity 23,500

Total $39,600

$\bf {ANSWER\: with\: explanation:}$

Sustainable Growth Rate = Retention Ratio x Return on Equity

Retention Ratio = 100 - Payout Ratio = 100 - 30% = 70%

Return on equity = Net Income / Equity = 3600 / 23500 x 100 = 15.32%

Hence the sustainable growth rate = 70 x 15.32% = 10.724%