your firm has an ROE of 12.0%, a pyaout ratio of 25%, $600,000 of stockholder\'s
ID: 2765392 • Letter: Y
Question
your firm has an ROE of 12.0%, a pyaout ratio of 25%, $600,000 of stockholder's equity, and $400,000 of debt. if you grow at your sustainable growth rate this year, how much additional debt will you need to issue? the sustainable growth rate is %? the ending total assets at the sustainable growth rate will be $? Because the firm grew at its sustainable growth rate, its debt/equity ratio remains constant at 0.666667 and the debt-to-assets ratio will be 0.4. thus, the new debt in the capital structure will be 0.4x$1,0900,000=$436,000. since the firm started at $400,000, it will issue about $36,000 in additional debt. is the above statement true or false?Explanation / Answer
Sustainable growth us calculated as = ROE× RETAINED EARNINGS
retained earnings are calculated as = (1- dividend payout)
in the given question ,
Growth = 12 × ( 1-.25)
= 9%
Hence the above statement is true as new debt capital structure include , 400000 × 9% = 36000 extra debt.
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