The financial statements of Eagle Sport Supply are shown in the below table. For

Question

The financial statements of Eagle Sport Supply are shown in the below table. For simplicity, "Cost" include interest. Assume that Eagle's assets are proportional to its sales. Assume a growth rate of 30%.

a. Assume that the dividend payout ratio is fixed at 50% and the equity-to-asset ratio is fixed at two-thirds. What is the internal growth rate of Eagle Sport?

b. What is the sustainable growth rate? (roudn answer 2 decimal places)

Income Statement Sales $2,750 Costs 1,150 Pretax income   1,600 Taxes ( at 30% )      480 Net income $1,120

Explanation / Answer

IRG = (ROA * b) / 1 - (ROA * b)...where b = retention ratio (1 - payout ratio)

ROA =1120/4800 =.0. 0.233333

ROA * b 0.233333* .50 =0.116667

IRG=.0.116667/(1-0.116667) =13.21%

Sustainable-growth rate = ROE x (1 - dividend-payout ratio)

ROE =1120/2900 = 38.62 %

Sustainable-growth rate = ROE x (1 - dividend-payout ratio) =38.62*.50=19.31%

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