Gadgets Inc. has the following information. Compare the spread between actual an
ID: 2615074 • Letter: G
Question
Gadgets Inc. has the following information. Compare the spread between actual and sustainable growth for 1998 with the spread for 2001 only, what is the main reason for the change in spread? Compare the components of the sustainable growth rate for the two years to see how each has contributed to the decrease/increase in sustainable growth.
Gadgets ($ in millions)
$208.20
8.00
64.70
30.80
1996 1997 1998 1999 2000 2001 sales $ 128.40 $171.60$208.20
$241.60 $288.40 net income8.00
8.30 0.40 6.10 12.80 total assets64.70
84.30 86.40 96.70 118.80 Equity30.80
49.10 58.50 60.00 66.10 79.40 Dividends - - - - - -Explanation / Answer
growth b/w 1998 and 2001
growth rate of revenue =(288.4-171.6)*100/171.6=68.07%
growth rate of net income =(12.8-8.3)*100/8.3=54.21%
There is increase in sales and hence increase in net income between this period.
sustainable growth rate= ROE*(1-dividend payout ratio) (assuming 0 dividends, DPR=0)
SGR(1998)=171.6/58.5=2.93%
SGR(2001)=288.4/79.4=3.63%
SGR tells hoe much growth rate should be maintained such that firm can sustain with its internal funding only.
This growth rate has increased over the period. Because equity has fallen, rise in net income has raised SGR.
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