IV. Use Law Specialists\' selected financial information above to answer the fol

Question

IV. Use Law Specialists' selected financial information above to answer the following questions: following questions:

a. Calculate Law Specialists' sustainable growth rate in each year.

b. Comparing the company's sustainable growth rate with its actual growth rate

Law Specialists, Inc. Selected financial information 2010 2011 2012 2013 2014 0.32 5.25 100.00 100.00 100.00 100.00 78.27 2.00 2.23 1.52 3.5526.19 4.94 Profit margin (%) Retention ratio (%) Asset turnover (X) Financial leverage (Y) Growth rate In sales (%) 6.89 0.11 2.47 2.03 1.16 22.89-10.05-28.76 2.78 1.69 1.38 1.32

Explanation / Answer

The Formula for Sustainable Growth Rate = Retention Ratio * Return on Equity

And ROE = Profit Margin * Asset Turnver * Financial Leverage

Thus we get

2010 : 100% * 6.89 * 2.78 * 1.69 = 32.37%

Thus, sustainable growth rate > actual growth rate which is 22.89%

2011 : 100% * 4.94 * 2.47 * 1.38 = 16.84%

Thus, sustainable growth rate > actual growth rate which is -10.05%

2012 : 100% * 0.11 * 2.03 * 1.16 = 0.25 %

Thus, sustainable growth rate > actual growth rate which is - 28.76%

2013 : 100% * 0.32 * 2 * 1.32 = 0.84%

Thus, sustainable growth rate < actual growth rate which is 3.55%

2014 : 78.27% * 5.25 * 2.23 * 1.52 = 13.93%

Thus, sustainable growth rate < actual growth rate which is 26.19%

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