Problem 3-45 Internal and Sustainable Growth Rates [LO 3 Better Burgers reported

Question

Problem 3-45 Internal and Sustainable Growth Rates [LO 3 Better Burgers reported the following numbers (in millions) for the years ending February 2014 and 2015. Net income Dividends Total assets Total equity S 1,577 221 $ 13,740 12,928 6,371 4,654 What are the internal and sustainable growth rates? (Do not round intermediate calculations and enter your a to 2 decimal places, e.g., 32.16.) Internal growth rate Sustainable growth rate What are the internal and sustainable growth rates using ROE x b and (ROA x b) and the end of period equity (a intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Internal growth rate Sustainable growth rate What are the growth rates if you use the beginning of period equity in this equation? (Do not round intermediate answers as a percent rounded to 2 decimal places, e.g., 32.16.) Internal growth rate Sustainable growth rate

Explanation / Answer

Return on Asssets at beginning of year = Net Income in 2015/ Assets at beginning of 2015

Return on Asssets at beginning of year = 1,577/ 13,740

Return on Asssets at beginning of year = 11.48%

Return on Asssets at End of year = Net Income in 2015/ Assets at end of 2015

Return on Asssets at End of year = 1,577/ 12,928

Return on Asssets at End of year = 12.20%

Return on Equity at beginning of year = Net Income in 2015/ Assets at beginning of 2015

Return on Equity at beginning of year = 1,577/ 6,371

Return on Equity at beginning of year = 24.75%

Return on Equity at End of year = Net Income in 2015/ Assets at end of 2015

Return on Equity at End of year = 1,577/ 4,654

Return on Equity at End of year = 33.88%

The retention ratio, b = 1 – Dividends/Net income

b = 1 – 221 / 1,577

b = .8599,

b = 85.99%

With the growth rate equations, we need to use the ROA and ROE based on the end of period assets or equity, so the internal growth rate is:

Internal growth rate = ((ROA) * (b)) / (1 – (ROA) * (b))

Internal growth rate = ((0.1220) * (0.8599)) / (1 - (0.1220) * (0.8599))

Internal growth rate = 11.72%

And the sustainable growth rate is:

Sustainable growth rate = ((ROE) * (b)) / (1 – (ROE) * (b))

Sustainable growth rate = ((0.3388) * (0.8599)) / (1 – (0.3388)(0.8599))

Sustainable growth rate = .4112, or 41.12%

Part B:

Using ROA * b and end of period assets to find the internal growth rate, we find:

Internal growth rate = ROA * b

Internal growth rate = 0.1220 * 0.8599

Internal growth rate = .1049, or 10.49%

Using ROE * b and end of period return on equity to find the internal growth rate, we find:

Sustainable growth rate = ROE * b

Sustainablegrowth rate = 0.3388 * 0.8599

Sustainable growth rate = 29.14%

Part C:

Using ROA * b and end of period assets to find the internal growth rate, we find:

Internal growth rate = ROA * b

Internal growth rate = 11.48% * 0.8599

Internal growth rate = 9.87%

Using ROE * b and end of period return on equity to find the internal growth rate, we find:

Sustainable growth rate = ROE * b

Sustainablegrowth rate = 24.75% * 0.8599

Sustainable growth rate = 21.28%

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

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