Use the following financial statements for Lake of Egypt Marina, Inc. Internal G

Question

Use the following financial statements for Lake of Egypt Marina, Inc.

Internal Growth rate _____%

Sustainable growth rate ______%

LAKE OF EGYPT MARINA, INC. Balance Sheet as of December 31, 2018 and 2017 (in millions of dollars) 2018 2017 2018 2017 Assets Liabilities and Equity Current assets: Current liabilities: Cash and marketable securities $ 90 $ 47    Accrued wages and taxes $ 58 $ 61 Accounts receivable 151 146    Accounts payable 108 98 Inventory 236 226    Notes payable 98 88 Total $ 477 $ 419      Total $ 264 $ 247 Fixed assets: Long-term debt: $ 318     $ 298 Gross plant and equipment $ 616 $ 507 Stockholders’ equity: Less: Depreciation 158 118    Preferred stock (5 million shares) $ 5 $ 5 Net plant and equipment $ 458 $ 389    Common stock and paid-in surplus 65 65    (65 million shares) Other long-term assets 68 67     Retained earnings 351 260 Total $ 526 $ 456     Total $ 421 $ 330 Total assets $ 1,003 $ 875     Total liabilities and equity $ 1,003 $ 875

Explanation / Answer

2018

Internal growth rate = ROA*(1-b)/ (1-ROA)*(1-b)

ROA= Net income attributable to common shareholders/ Total assets

= 156/1003 = 15.55%

b = Dividend paid/ Net Income = 65/156 = 41.67%

IGR= ROA*(1-b)/ (1- ROA*(1-b))

15.55%*(1-0.41667)/ (1-(0.1555* (1-0.41667))

= 9.98%

ROE= Net income attributable to common shareholders/ Total equity

= 156/(65+351) = 37.5%

SGR= ROE*(1-b)/ (1- ROE*(1-b))

=37.5%*(1-0.41667)/ (1-(0.375* (1-0.41667))

= 28%

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