Question

Given the financial statements below for Dragonfly Enterprises, what would be the sustainable growth rate (SGR) if the company decided to change the dividend payout rate to 44.7%? Enter your answer as the nearest tenth of a percent (e.g., 12.3), but do not include the % sign. Dragonfly Enterprises Income Statement ($ Million) 2011 Sales 370 Cost of Goods Sold 226 Selling, General, & Admin Exp. 62 Depreciation 20 Earnings Before Interest & Taxes 62 Interest Expense 12 Taxable Income 50 Taxes at 40% 20 Net Income 30 Balance Sheets as of 12-31 Assets 2010 2011 Cash 10 10 Account Receivable 46 50 Inventory 43 45 Total Current Assets 99 105 Net Fixed Assets 166 195 Total Assets 265 300 Liabilities and Owners Equity 2010 2011 Accounts Payable 26 30 Notes Payable 0 0 Total Current Liabilities 26 30 Long-Term Debt 140 150 Common Stock 22 22 Retained Earnings 77 98 Total Liab. and Owners Equity 265 300

Answer 1

Total Equity = Common Stock + Retained Earnings
Total Equity = $22 + $98
Total Equity = $120

Return on Equity, ROE = Net Income / Total Equity
Return on Equity, ROE = $30 / $120
Return on Equity, ROE = 0.25 or 25.00%

Retention Ratio, b = 1 - Dividend Payout Ratio
Retention Ratio, b = 1 - 0.4470
Retention Ratio, b = 0.5530

Sustainable Growth Rate = [ROE * b] / [1 - ROE * b]
Sustainable Growth Rate = [0.25 * 0.5530] / [1 - 0.25 * 0.5530]
Sustainable Growth Rate = 0.13825 / 0.86175
Sustainable Growth Rate = 0.160 or 16.0%