The following table presents financial information for Boss Stores, Inc., a reta

Question

The following table presents financial information for Boss Stores, Inc., a retail chain store in the U.S.

Use the above information from Boss's annual financial statements. What is the sustainable sales growth rate for 2010?

- 17.6%

- 7.9%

9.07%

10.27%

12.23%

21.4%

- 17.6%

- 7.9%

9.07%

10.27%

12.23%

21.4%

Boss Stores, Inc. (S in millions) 2009 2010 $287.31 339.19 $411.78 19.70 275.30 318.43 191.90 211.03 0.58 2011 446.84 12.23 451.32 222.57 0.69 2008 Sales Net income Total assets Equity Dividends 11.22 268.58 180.63 16.48 5.21

Explanation / Answer

Here, we need to find the sustainable sales growth rate i.e. SGR

SGR is nothing but the rate at which company can grow using its own sales by reinvesting its own profits that are remaining after paying out dividend. Formula for SGR is Return on Equity multiplied by Retention ratio. Retention ratio is (1-dividend payout ratio). ROE is Net income / Equity.

Using the above mentioned formula, let us calculate ROE

ROE for 2010 = Net income / Equity = 19.70 / 211.03 = 0.0934 i.e. 9.34%

Retention ratio = 1 - dividend payout ratio where dividend payout ratio = dividend / earnings = 0.58 / 19.70 = 0.0294 i.e. 2.94%

Retention ratio = 1 - 0.0294 = 0.9706

SGR = ROE * Retention Retio = 0.0934 * 0.9706 = 0.0907 i.e. 9.07%

Thus we get that the SUSTAINABLE GROWTH RATE in 2010 is 9.07%

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