Question

The most recent financial statements for Schenkel Co. are shown here: Income Statement Balance Sheet Sales $ 18,000 Current assets $ 11,900 Debt $ 16,400 Costs 12,100 Fixed assets 28,750 Equity 24,250 Taxable income $ 5,900 Total $ 40,650 Total $ 40,650 Taxes (40%) 2,360 Net income $ 3,540 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 40 percent dividend payout ratio. No external equity financing is possible. What is the sustainable growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Sustainable growth rate %

Answer 1

Answer: 9.60%

Step-by-step explanation:

`Return\ on\ Equity\ (ROE)=(Net\ Income)/(Total\ Equity)`

`Return\ on\ Equity\ (ROE)=(3,540)/(24,250)`

= 0.1460 or 14.60%

The plow-back ratio, b, is one minus the dividend payout ratio,

b = 1 - 40%

= 0.60

`Sustainable\ Growth\ Rate=(ROE* b)/([1-(ROE* b)])`

`Sustainable\ Growth\ Rate=(0.1460* 0.60)/([1-(0.1460* 0.60)])`

= 0.0960, or 9.60%