The most recent financial statements for Live Co. are shown here: Income Stateme

Question

The most recent financial statements for Live Co. are shown here: Income Statement Balance Sheet Sales $ 18,000 Current assets $ 11,900 Debt $ 16,400 Costs 12,100 Fixed assets 28,750 Equity 24,250 Taxable income $ 5,900 Total $ 40,650 Total $ 40,650 Taxes (40%) 2,360 Net income $ 3,540 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 40 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.

Explanation / Answer

Return on Equity = Net Income / Total Equity

ROE = 3,540 / 24,250

ROE = 0.14597 or 14.60%

The plowback ratio,b, is one minus the payout ratio, so:

b= 1 – 0.40

b = 0.60

Now we can use the sustainable growth rate equation to get:

Sustainable growth rate=(ROE ×b) / [1 – (ROE ×b)

Sustainable growth rate= [0.14597 (0.60)] / [1-0.14597 (0.60)]

Sustainable Growth rate = 0.087582/ 0.912418

Sustainable Growth rate = 0.0959

Sustainable Growth rate = 9.598 or 9.60%

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