The most recent financial statements for Live Co. are shown here: Assets and cos

Question

The most recent financial statements for Live Co. are shown here:

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 15 percent dividend payout ratio. No external financing is possible.

What is the sustainable growth rate (in %)?

(Enter your answer as a percentage, omit the "%" sign in your response, and round your answer to 4 decimal places. For example, 1.23456% should be entered as 1.2346)

Income Statement Sales $19529 Costs $10242 Taxable Income ? Taxes (40%) ? Net Income ?

Explanation / Answer

Sustainable growth rate = (ROE × b) / [1 – (ROE × b)]

Sustainable growth rate = [0.2050(.85)] / [1 – 0.2050(.85)]

Sustainable growth rate = .21102 or 21.10%

Income Statement Balance Sheet Sales $19,529.00 Current Asset $     11,784 Debt $14,063 Costs    10,242.00 Fixed Asset $     29,462 Equity $27,183 Taxable Income      9,287.00 Taxes (40%)      3,714.80 Net Income $ 5,572.20 To calculate the sustainable growth rate, we first need to calculate the ROE, which is: ROE = NI / TE ROE = $5,572.20 / $27,183 ROE = .2050 or 20.50% The plowback ratio, b, is one minus the payout ratio, so: b = 1 .15 b = .85 Now we can use the sustainable growth rate equation to get:

Sustainable growth rate = (ROE × b) / [1 – (ROE × b)]

Sustainable growth rate = [0.2050(.85)] / [1 – 0.2050(.85)]

Sustainable growth rate = .21102 or 21.10%

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