You’ve collected the following information about Odyssey, Inc.: What is the sust
ID: 2740864 • Letter: Y
Question
You’ve collected the following information about Odyssey, Inc.:
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))
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))
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))
You’ve collected the following information about Odyssey, Inc.:
Explanation / Answer
1) Calculation of sustainable growth rate :
Sustainable growth rate = (1 - dp ratio) * ROE
Dividend payout ratio = dividend / Net income
= 9800/15600
= 62.82%
Return on equity = Net income / Total equity (shareholder's equity)
= 15600/70000
= 22.286%
Sustainable growth rate = (1 - 0.6282) * 22.286%
= 8.286%
2) Calculation of New borrwings at this growth rate :
Present debt equity ratio = 96000 / 70000
= 1.37143
Net income at sustainable growth rate
= $16892.62 (15600*108.286%)
DP ratio = 62.82%
Dividends = $10612 (16892.62 *62.82%)
Retained earnings = $6280.62 (16892.62 - 10612)
Total equity = $76280.62 (70000 + 6280.62)
Total debt = $104,614
Additional financing = $8614 (104614 - 96000)
3 ) Calculation of growth rate where no outside financing required :
The growth rate which require no outside finance is internal growth rate.
Internal growth rate = (Net income / total assets)
= 15600 / (96000+70000)
= 9.40 %
If the internal growth rate was more than sustainable growth rate then there is no need for outside financing.
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