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The most recent financial statements for Live Co. are shown here: Income Statement Sales $15752 Costs...

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Accounting

The most recent financial statements for Live Co. are shownhere: Income Statement Sales $15752 Costs $11206 Taxable Income ?Taxes (40%) ? Net Income ? Balance Sheet Current Asset $13516 Debt$16391 Fixed Asset $25944 Equity ? Assets and costs areproportional to sales. Debt and equity are not. The companymaintains a constant 20 percent dividend payout ratio. No externalfinancing is possible. What is the sustainable growth rate (in%)?

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3.6 Ratings (565 Votes)

Income statement
Sales $15,752
Cost $11,206
Taxable income $4,546
Taxes 40% $1,818
Net Income $2,728
Balance sheet
Debt $16,391 Current assets $13,516
Equity (Bal. fig) $23,069 Fixed assets $25,944
Total $39460 Total $39,460
To calculate sustainable growth rate we first need to calculate the ROE, which
Return on equity      =   Net income /Total equity
Return on equity   =     $2728/$23069
Return on equity    =   0.118237   or 11.8237
The plow back ratio , b,one minus the payout ratio, so
b= 1-.020 b = 0.80
Now we can use the sustainable growth rate equation to get
Sustainable growth rate   = (ROE x b) / [1- (ROE x b)]
[0.118237 x 0.80] /[1- (0.118237 x 0.80)]
0.104472     or   10.4472

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