Question

Eagle Sports Supply has the following financial statements. Assume that Eagle’s assets are proportional to its sales.

INCOME STATEMENT, 2019
Sales $ 950
Costs 250
Interest 50
Taxes 150
Net income $ 500
BALANCE SHEET, YEAR-END
2018 2019 2018 2019
Assets $ 2,700 $ 3,000 Debt $ 900 $ 1,000
Equity 1,800 2,000
Total $ 2,700 $ 3,000 Total $ 2,700 $ 3,000

a. What is the internal growth rate of Eagle Sports if the dividend payout ratio is fixed at 70% and the equity-to-asset ratio is fixed at 2/3?
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
b. What is the sustainable growth rate?
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.

Answer 1

The internal growth rate of Eagle Sports is 5% and the sustainable growth rate is 13.89%.

Step-by-step explanation:

To calculate the internal growth rate of Eagle Sports, we can use the formula:

IRR = (Net Income / Total Assets) * (1 - Dividend Payout Ratio)

Given the information provided, the dividend payout ratio is fixed at 70% and the equity-to-asset ratio is fixed at 2/3. So, we have:

IRR = (500 / 3000) * (1 - 0.7) = 0.1667 * 0.3 = 0.05 = 5%

To calculate the sustainable growth rate, we can use the formula:

SGR = (Net Income / Total Assets) * (1 - Dividend Payout Ratio) * (1 + Equity-to-Asset Ratio)

Using the given values, we have:

SGR = (500 / 3000) * (1 - 0.7) * (1 + 2/3) = 0.1667 * 0.3 * 1.6667 = 0.0833 * 1.6667 = 0.1389 = 13.89%