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 $38,814 Debt $38,254 Costs 10,800 Fixed assets 27,160 Equity 27,720 Taxable income $7,200 Total $65,974 Total $65,974 Taxes (34%) 2,448 Net income $4,752 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 28 percent dividend payout ratio. No external equity financing is possible. Required: What is the sustainable growth rate? (Do not round your intermediate calculations.)

a. 5.04 %

b. 5.47 %

c 13.58 %

d.14.08 %

E14.58 %

Explanation / Answer

Rate on equity, ROE = Net Income /Total equity

= $ 4,752/ $ 27,720 = 0.1714

Sustainable growth rate = (ROE x b)/{1-(ROE x b)}

The plowback ratio, b = 1- payout ratio

b = 1 0 .28 =0.72

Sustainable growth rate = [0.1714 x (0.72)] / [1 .1714 x (0.72)]

                                                = 0.12341/1-0.12341

                                                = 0.12341/0.8765

                                                =0.1408 or 14.08 %

Answer : d) 14.08 %

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.