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. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))

(b)	If it does grow at this rate, $ in new borrowing will take place in the coming year, assuming a constant debt-equity ratio. (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))

(c)	The maximum growth rate that can be supported without any outside financing is percent. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))

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%