# 15 0 6 Problem 18-20 Sustainable Growth (LO3) 20 points Plank\'s Plants had ne
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Question
# 15 0 6 Problem 18-20 Sustainable Growth (LO3) 20 points Plank's Plants had net income of $4,000 on sales of $60,000 last year. The firm paid a dividend of $1,840. Total assets were $200,000. of which $120,000 was financed by debt a. What is the frm's sustainable growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) growth rate Hint Print b. If the firm grows at its sustainable growth rate, how much debt will be issued next year? (Do not round intermediate calculations.) References c. What would be the maximum possible growth rate if the firm did not issue any debt next year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) growth rateExplanation / Answer
a. Total asset = total debt + total equity
Or total equity = Total asset - total debt
Where,
Total asset = $200,000
Total debt = $120,000
Therefore total equity = $200,000 -$120,000 = $80,000
Return on Equity (ROE) = Net income / Total equity
Where net income = $4,000
Therefore
Return on Equity (ROE) = $4,000 / $80,000 = 0.05 or 5%
Sustainable Growth rate = Retention rate * ROE
Where, retention rate = (1- payout rate)
Where payout rate = dividend paid / net income = $1,840/$4,000 =0.46 or 46%
Therefore, retention rate = (1- payout rate) = (1-0.46) =0.54 or 54%
Therefore,
Sustainable Growth rate =0.54 * 5% = 2.7%
b. If the firm grows at its sustainable growth rate of 2.7%
Then total asset, total equity and total debt will also grow at 2.7%
Therefore total debt will grow = $120,000 *2.7% = $3,240
Therefore debt will be issued next year is $3,240
c. The maximum possible growth rate if the firm did not issue any debt next year will be supported by only retained earnings
Therefore, maximum possible growth rate = retention rate * ROE *(Total equity / Total asset)
= 0.54 *5% *($80,000/$200,000)
= 1.08%
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