Sustainable Growth Rate [-O3] Gilmore, Inc., had equity of $161,000 at the begin
ID: 2744206 • Letter: S
Question
Sustainable Growth Rate [-O3] Gilmore, Inc., had equity of $161,000 at the beginning of the year. At the end of the year, the company had total assets of $305,000. During the year, the company sold no new equity. Net income for the year was $29,000 and dividends were $6, 200. What is the sustainable growth rate for the company? What is the sustainable growth rate if you use the formula ROE X b and beginning of period equity? What is the sustainable growth rate if you use end of period equity in this formula? Is this number too high or too low? Why?Explanation / Answer
GILMORE INC. Equity at the beginning $ 161,000.00 Total assets at the end $ 305,000.00 Net Income for the year $ 29,000.00 Dividend $ 6,200.00 What is the sustainable growth rate of the company No new equity has been issued by the company so ,shareholder's equity will be increased by retained earnings Retained Earnings for the year : Retained Earnings= Net Income-dividend Retained Earniings= $ 22,800.00 Equity at the end of the year: Equity at the beginning + Retained Earnings $ 183,800.00 Equity at the end of the year: Return on Equity=Net Income/Equity 0.1578 15.78 % Plowback Ratio=Retianed Earnings/Net Income 0.786 78.62 % Sustainable growth rate= (ROE*b)/((1-(ROE*b)) 0.141614907 14.16 % The ROE based on beginning period equity= 0.180124224 18.01 % Sustainable growth rate= 0.141614907 14.16 % The ROE based on end of period equity= 0.157780196 15.78 % Sustainable growth rate= 0.124047878 12.40 % Sustainable growth rate is the maximum growth rate that the the firm can achieve without additional borrowings,after achieving this growth,the firm growth would generally be decline so firm needs more borrowings to achieve additional growth. In this case Sustainable growth rate at the beginning of the period so firm needs more borrowings to achieve additional growth further.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.