Question

hayesville corporation had net income of $9 million this year on net sales of $148 million per year. at the beginning of this year, its total equity was 58.8 million and it held $88 million in total liabilities. it paid out $2.5 million in dividends for the year. what is hayesville corporation's sustainable growth rate? (round to nearest whole percent

Answer 1

The sustainable growth rate (SGR) is the maximum rate at which a company can grow using only internal funding sources such as retained earnings, without having to raise additional equity or debt capital. It is calculated as:

SGR = (Net Income / Total Equity) x (1 - Dividend Payout Ratio)

where the dividend payout ratio is the percentage of net income that is paid out as dividends.

In this case, we have:

Net Income = $9 million
Total Equity = $58.8 million
Dividends = $2.5 million
Net Sales = $148 million
Total Liabilities = $88 million

First, we need to calculate the dividend payout ratio:

Dividend Payout Ratio = Dividends / Net Income
= $2.5 million / $9 million
= 0.2778

Next, we can calculate the SGR:

SGR = (Net Income / Total Equity) x (1 - Dividend Payout Ratio)
= ($9 million / $58.8 million) x (1 - 0.2778)
= 0.1282 or 12.82%

Therefore, Hayesville Corporation's sustainable growth rate is 12.82% (rounded to the nearest whole percent). This means that the company can grow at a maximum rate of 12.82% per year using only internal funding sources, assuming all other factors remain constant.