Question

You' ve collected the following information about St. Pierre, Inc.: |

Sales | $150,000 |

Net income | $18,000 |

Dividends | $10,000 |

Total debt | $89,000 |

Total equity | $57,000 |

Required: |

(a) |
The sustainable growth
rate for St. Pierre, Inc. is percent. |

(b) |
If it does grow at
this rate, $ in new borrowing will take place in the coming year,
assuming a constant debt-equity ratio. |

(c) |
The maximum growth
rate that can be supported without any outside financing is
percent. |

Answer #1

a)

ROE = net income/total equity

= 18000/57000

= 31.58%

Retention ratio = (net income - dividends)/net income

= (18000 - 10000)/18000

= 44.44%

sustainable growth rate = (ROE * retention)/[1-(ROE * retention)

= (0.3158*0.4444)/(1-(0.3158*0.4444))

= 16.33%

b)

New total assets= total assets * (1+ growth rate)

= (89000+57000) * 1.1633

= 169841.8

New total debt = (debt/total assets)*new total assets

= (89000/(89000+57000))*169841.8

= 103533.7

additional borrowing = 103533.7 - 89000

= 14533.7

c)

ROA = net income/total assets

= 18000/(89000+57000)

= 12.33%

Internal growth rate = (ROA * retention)/[1-(ROA*retention)]

= (12.33% * 44.44%)/[1-(12.33%*44.44%)]

= 5.80%

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