Problem 4-22 Sustainable Growth Rate [LO3] Cambria, Inc., had equity of $175,000
ID: 1171286 • Letter: P
Question
Problem 4-22 Sustainable Growth Rate [LO3] Cambria, Inc., had equity of $175,000 at the beginning of the year. At the end of the year, the company had total assets of $330,000. During the year the company sold no new equity. Net income for the year was $37,000 and dividends were $5,000. What is the sustainable growth rate for the company? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Sustainable growth rate % What is the sustainable growth rate if you use the formula ROE × b and beginning of period equity? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Beginning of period equity % What is the sustainable growth rate if you use end of period equity in this formula? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) End of period equity %
Explanation / Answer
Calculation of sustainable growth rate when begining equity is used
Return on equity = Net income/Equity
= 37,000/175,000
= 21.14%
Dividend payout ratio = Dividend/ Net income
= 5,000/37,000
= 0.1351
Business retention rate = 1 - Dividend payout ratio
= 1 - 0.1351
= 0.8649
Sustainable growth rate = Return on equity x Business retention rate
= 21.14 x 0.8649
= 18.29 %
Calculation of sustainable growth rate when ending equity is used
Ending equity = Equity in the begining + Net income
= 175,000 + 37,000
= $212,000
Return on equity = Net income/Equity
= 37,000/212,000
= 17.45%
Dividend payout ratio = Dividend/ Net income
= 5,000/37,000
= 0.1351
Business retention rate = 1 - Dividend payout ratio
= 1 - 0.1351
= 0.8649
Sustainable growth rate = Return on equity x Business retention rate
= 17.45 x 0.8649
= 15.10 %
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.