You\'ve collected the following information about Odyssey, Inc.: Sales Net incom

Question

You've collected the following information about Odyssey, Inc.: Sales Net income Dividends Total debt Total equity $ 220,000 $14,800 $ 9,400 $88,000 $66,000 What is the sustainable growth rate for the company? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) to 2 decimal places. (e.g., 32.16) Sustainable growth rate If it does grow at this rate, how much new borrowing will take place in the coming year, assuming a constant debt-equity ratio? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16) Additional borrowing What growth rate could be supported with no outside financing at all? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) to 2 decimal places. (e.g., 32.16) Internal growth rate

Explanation / Answer

Q. 1) Sustainable growth rate = (1 - d) * ROE

d = dividend pay out ratio = dividend / net income = 9400 / 14800 = 0.635

ROE = Return on equity = Net income / Total equity = 14800 / 66000 = 0.224 i.e., 0.224 * 100 = 22.4 %

Thus, Sustainable growth rate = (1 - 0.635) * 22.4 = 8.176 % [ 8.18 % (approx) ]

Conclusion:- Sustainable growth rate = 8.18 % (approx)

Q. 3) Internal growth rate (with not outside financing at all) = ROA * b / 1 - (ROA * b)

   ROA = Return on assets = Net income / Total assets = 14800 / 88000 + 66000 = 14800 / 154000 = 0.0961

b = retention ratio = 1 - dividend payout ratio = 1 - 0.635 = 0.365

   Internal growth rate = 0.0961 * 0.365 / 1 - (0.0961 * 0.365)

   = 0.0350765 / 1 - 0.0350765

   = 0.0350765 / 0.9649235

   = 0.0363 i.e., 0.0363 * 100 = 3.63 % (approx)

(NOTE):- Total assets = debt + equity = 88000 + 66000 = $ 154000

Conclusion:- Internal growth rate = 3.63 %

Q. 4) Mc Govney Co.

   Return on equity = Net income / Total equity = 6600 / 72400 = 0.09116 i.e., 0.09116 * 100 = 9.116 %

b = retention ratio = 1 - d = 1 - 0.25 = 0.75

   Sustainable growth rate = (1 - d) * Return on equity = (1 - 0.25) * 9.116 = 0.75 * 9.116 = 6.837 i.e., 6.84 % (approx).

Thus, the maximum increase in sales that can be sustained assuming no new equity is issued:-

= 52000 * 6.84 % = $ 3556.80

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