The most recent financial statements for Live Co. are shown here: Income Stateme
ID: 2740716 • Letter: T
Question
The most recent financial statements for Live Co. are shown here: Income Statement Balance Sheet Sales $ 17,800 Current assets $ 11,300 Debt $ 15,800 Costs 13,100 Fixed assets 27,250 Equity 22,750 Taxable income $ 4,700 Total $ 38,550 Total $ 38,550 Taxes (40%) 1,880 Net income $ 2,820 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 20 percent dividend payout ratio. No external equity financing is possible. What is the sustainable growth rate? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Solution :- Retention ratio (b) = 1 - Dividend payout ratio.
= 1 - 0.20
= 0.80
Return on equity (ROE) = Net income / Total equity.
= 2820 / 22750
= 0.124 i.e., 12.40 % (approx).
Sustainable Growth Rate (SGR) = (b * ROE) / [ 1 - (b * ROE) ]
= (0.80 * 0.124) / [ 1 - (0.80 * 0.124) ]
= 0.0992 / [ 1 - 0.0992 ]
= 0.0992 / 0.9008
= 0.1101 i.e., 11.01 %
Conclusion :- Sustainable Growth Rate (SGR) = 11.01 % (approx).
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.