Problem 3-43 Sustainable Growth and Outside Financing [LO 3] You\'ve collected t

Question

Problem 3-43 Sustainable Growth and Outside Financing [LO 3] You've collected the following information about Ena, Inc.: $305,000 = $ 18,200 Sales Net income Dividends Total debt Total equity 7,000 $65,000 - 96,000 What is the sustainable growth rate for the company? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Sustainable growth rate Assuming it grows at this rate, how much new borrowing will take place in the coming year, assuming a constant debt-equity ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Additional borrowing What growth rate could be supported with no outside financing at all (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Growth rate

Explanation / Answer

Sustainable Growth Company”-

Sustainable Growth Company means an organization which is maintaining sustainable growth during the previous years. Sustainable growth rate is the maximum growth rate in a business without having to increase its finance leverage or debt financing, its maximum growth rate can be achieved give’s the company profitability,asset utilization, dividend payout and debt ratios.

Sustainable Groth rate = return on Equity (1 – Dividend payout ratio)

                                    = 11.30%( 1.00 - .38)

                                    = 11.30% (.62)

                                    = 7.00%

Return on Equity=       net income / sales     Diviend Payout Ratio = Dividend / net income

                            =       18200/161000                                                          =.38

                             =      11.30%

2 Debt Equity ratio = Debt / Equity =           0.68 New Equity Funds with the company current funds + retained profits of company 96000+(18200-7000) Shareholder funds for next year 105200 Debt needed for next year to maintain constant debt equity ratio 0.68 = debt / 105200 debt = 71536 Further Debt has to be taken Debt Funds- already existing debt 6536 3 the growth rate can be supported with no outside financing is the internal growth rate. Return on assets 18200/161000 11.30% This means internal groth rate is ROA*b/1-ROA*b =0.113*0.62/(1-(0.113*0.62)) =7.53%

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