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 $19,000 Current assets $40,970 Debt $40,379 Costs 11,400 Fixed assets 28,669 Equity 29,260 Taxable income $7,600 Total $69,639 Total $69,639 Taxes (33%) 2,508 Net income $5,092

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 36 percent dividend payout ratio. No external equity financing is possible. Required: What is the sustainable growth rate? (Do not round your intermediate calculations.)

Multiple Choice 13.03 % 4.91 % 12.03 % 12.53 % 6.68 %

Explanation / Answer

Answer:

Sustainable Growth Rate = (ROE * b) / [1 – (ROE * b)]
Return on Equity (ROE) = Net Income / Total Equity
Return on Equity (ROE) = 5,092 / 29,260
Return on Equity (ROE) = 0.1740 or 17.40%

Retention Ratio (b) = 1 – Dividend Payout Ratio
Retention Ratio (b) = 1 – 0.36
Retention Ratio (b) = 0.64

Sustainable Growth Rate = (0.1740 * 0.64) / [1 – (0.1740 * 0.64)]
Sustainable Growth Rate = 0.11136 /[1 – 0.11136]
Sustainable Growth Rate = 0.11136 / 0.88864
Sustainable Growth Rate = 0.1253 or 12.53%

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