Better Burgers reported the following numbers (in millions) for the years ending

Question

Better Burgers reported the following numbers (in millions) for the years ending February 2014 and 2015 2014 Net income Dividends Total assets Total equity 2015 $ 1,517 215 $13,680 12,868 4,594 6,311 What are the internal and sustainable growth rates? (Do not round 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 internal and sustainable growth rates using ROE × b and (ROA × b) and the end of period equity (assets)? (Do not round 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 calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Internal growth rate Sustainable growth rate

Explanation / Answer

Using the beginning of period total assets, the ROA is:

ROABegin = $1,517 / $13,680

ROABegin = .1109, or 11.09%

Using the end of period total assets, the ROA is:

ROAEnd = $1,517 / $12,868

ROAEnd = .1179, or 11.79%

The ROE using beginning of period equity is:

ROEBegin = $1,517 / $6,311

ROEBegin = .2404, or 24.04%

The ROE using the end of period equity is:

ROEEnd= $1,517 / $4,594

ROEEnd= .3302, or 33.02%

The retention ratio, which is one minus the dividend payout ratio, is:

b = 1 – Dividends/Net income

b = 1 - 215/1517

= 0.8583

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 = [(.1179)(.8583)] / [1 – (.1179)(.8583)]

Internal growth rate  = 0.1126 or 11.26 %

And the sustainable growth rate is

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

= [(.3302)(.8583)] / [1 – (.3302)(.8583)]

= 0.3955 or 39.55%

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

Internal growth rate = ROAEnd× b

Internal growth rate = 0.1179 x 0.8583

= 0.1012or 10.12%

And, using ROE × b

Sustainable growth rate = 0.3302*0.8583

Sustainable growth rate = 0.2834 or 28.34%

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

Internal growth rate = ROAEnd× b

Internal growth rate = 0.1109 x 0.8583

= 0.0952 or 9.52%

And, using ROE × b

Sustainable growth rate = 0.2404 * 0.8583

Sustainable growth rate = 0.2063 or 20.63%

a) Internal growth rate 11.26% Sustainable growth rate 39.55% b) Internal growth rate 10.12% Sustainable growth rate 28.34% c) Internal growth rate 9.52% Sustainable growth rate 20.63%

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