Question

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

Income Statement				Balance Sheet
Sales	$	19,300		Current assets	$	11,780		Debt	$	15,940
Costs		13,200		Fixed assets		27,900		Equity		23,740
Taxable income	$	6,100		Total	$	39,680		Total	$	39,680
Taxes (21%)		1,281
Net income	$	4,819

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 45 percent dividend payout ratio.

What is the sustainable growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Solution:- Given in Question-

Net Income = $4,819

Net Income on Equity = $4,819 * 55% = $2,650.45

Equity = $23,740

First we need to calculate Return on Equity(ROE)-

ROE =

ROE =

ROE = 11.16%

Then, We need to find Retention ratio-

Retention Ratio = 1 - Dividend Payout Ratio

Retention Ratio = 1 - 0.45

Retention Ratio = 0.55

To Calculate Sustainable Growth Rate-

Sustainable Growth Rate = Retentio Ratio * Return on Equity

Sustainable Growth Rate = 0.55 * 11.16%

Sustainable Growth Rate = 6.14%

If you have any query related to question then feel free to ask me in a comment. Thanks. Please rate.