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 $ 16,500 Current assets $ 11,500 Debt $ 16,000 Costs 10,700 Fixed assets 27,750 Equity 23,250 Taxable income $ 5,800 Total $ 39,250 Total $ 39,250 Taxes (40%) 2,320 Net income $ 3,480 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?

Explanation / Answer

To calculate Sustainable growth rate we must calculate ROE

ROE = NI/TE =$3480/$23250 = 14.97%

The plowback ratio b = 1- dividend pay out ratio =1-0.4 = 0.6

Sustainable growth rate equation = (ROE * b) / [1-(ROE * b)]

= (14.97%*0.6)/[1- (14.97%*0.6)]

=9.87%

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