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

Question

The most recent financial statements for Live Co. are shown here: Income Statement Balance Sheet Sales $ 14,500 Current assets $ 12,000 Debt $ 16,500 Costs 8,400 Fixed assets 29,000 Equity 24,500 Taxable income $ 6,100 Total $ 41,000 Total $ 41,000 Taxes (40%) 2,440 Net income $ 3,660 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 30 percent dividend payout ratio. No external equity financing is possible. What is the sustainable growth rate? The answer is not 10.46%..

Explanation / Answer

To calculate the internal growth rate, we first need to calculate the ROA, which is:

ROA = NET INCOME / TANGIBLE ASSETS

ROA = $6,100 / $41,000

ROA = 0.1488, or 14.88%

The plowback ratio , b, is one minus the payout ratio, so:

b= 1 – 0.30

b= 0.70

Now we can use the Sustainable growth rate equation to get:

Growth rate= (ROA ×b) / [1 – (ROA ×b)]

Growth rate= [0.1488*(0.70)] / [1 – 0.1488 *(0.70)]

Growth rate= 0.1163, or 11.63%

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