I Am Myself, Inc., had total assets of $286,000 and equity of $177,000 at the be
ID: 2813149 • Letter: I
Question
I Am Myself, Inc., had total assets of $286,000 and equity of $177,000 at the beginning of the year. At the end of the year, the company had total assets of $311,000. During the year the company sold no new equity. Net income for the year was $91,000 and dividends were $43,500.
What is the sustainable growth rate if you calculate ROE based on the end of period equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
What is the sustainable growth rate if you calculate ROE based on the beginning of period equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
I Am Myself, Inc., had total assets of $286,000 and equity of $177,000 at the beginning of the year. At the end of the year, the company had total assets of $311,000. During the year the company sold no new equity. Net income for the year was $91,000 and dividends were $43,500.
Explanation / Answer
the sustainable growth rate is calculated as the:
Retention ratio * ROE
beginning equity = $1,77,000
add: retained earnings during the year :
(net income - dividends )= 47,500
equity at the end of the year = $2,24,500
so, return on equity = $91,000/$2,24,500 = 0.4053
Dividends pay out ratio :
dividneds / net income = 0.4780
therefore, the retention ratio = 0.52
so sustainable growth rate = ROE * RETENTION RATIO
=0.4053 *0.52
=21.08% based on equity at the end of the year
ROE = net income/ beginning of year equity
= $91,000/$1,77,000
= 0.5141
Dividends pay out ratio :
dividends / net income = 0.4780
therefore, the retention ratio = 0.52
so, the sustainable growth rate = 26.73% based on beginning of year equity
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