Question

The most recent financial statements for Schenkel Co. are shown here:

Income Statement Balance Sheet
Sales $14,100 Current assets $10,800 Debt $15,300
Costs 8,300 Fixed assets 26,000 Equity 21,500
Taxable income $5,800 Total $36,800 Total $36,800
Taxes (40%) 2,320
Net income $3,480

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 30 percent dividend payout ratio. No external financing is possible.

Required:
What is the sustainable growth rate?

Answer 1

12.78%

Step-by-step explanation:

Calculation for What is the sustainable growth rate

First step is to calculate ROE

Using this formula

ROE = NI / TE

Let plug in the formula

ROE = $3,480 / 21,500

ROE = .1619*100

ROE= 16.19%

Second step is to calculateThe plowback ratio b

Plowback ratio b = 1 - .30

Plowback ratio b = .70

Now let calculate the sustainable growth rate using this formula

Sustainable growth rate = (ROE × b) / [1 - (ROE × b)]

Let plug in the formula

Sustainable growth rate = [. 1619(.70)] / [1 - . .1619(.70)]

Sustainable growth rate=0.11333/(1-0.11333)

Sustainable growth rate=0.1133/0.88667

Sustainable growth rate = .1278*100

Sustainable growth rate=12.78%

Therefore the sustainable growth rate will be 12.78%