Chapter 4 Problem 10 -- Eight Ball Sporting Goods a. Use the information below f

Question

Chapter 4 Problem 10 -- Eight Ball Sporting Goods
a. Use the information below from Eight Ball's annual financial statements to calculate the actual and sustainable growth rate for each year.
b. Do you think Eight Ball Sporting Goods is having a problem financing its growth? Is the increase in dividends a good idea for Eight Ball?

Eight Ball Sporting Goods ($ in thousands) 2003 2004 2005 2006 2007 2008 Sales 477.84      491.62      706.52      792.01      876.52 1,088.46 Net income           -          43.27        26.31        38.48        44.84        25.76 Total assets           -        477.06      648.42      664.26      697.16      982.63 Equity           -        346.32      426.01      465.85      432.91      553.27 Dividends           -               -               -            0.80          1.65          2.22

Explanation / Answer

Actual growth rate of :-

1st year = (491.62 - 477.84)/477.84 =

2nd year = (706.52-491.62)/491.62 =

3rd year = (792.01-706.52)/706.52 =

4th year = (876.52-792.01)/792.01 =

5th year = (1008.46-876.52)/876.52 =

Sustainable growth rate (SGR) = return on equity * (1 - dividend payout ratio)

return on equity = net income/equity

dividend payout ratio =dividend/equity

Thus you can get the SGR of each year.

2)If sustainable growth is greater than actual growth, the company might be underperforming. If the actual growth rate is greater than sustainable growth, the company may run into trouble because of unrestrained growth.

Sustainable growth is defined as the annual percentage of increase in sales that is consistent with a defined financial policy (target debt to equity ratio, target dividend payout ratio, target profit margin, target ratio of total assets to net sales). Yes with the increase in dividend the growth rate has the chances to improve.

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