Question

Cambria, Inc., had equity of $132547 at the beginning of the year. At the end of the year, the company had total assets of $288467. During the year the company sold no new equity. Net income for the year was $27340 and dividends were $4352.

What is the sustainable growth rate for the company? (in %) (round to 4 decimal places)

Answer 1

Sustainable Growth Rate = [ROE x (1-Dividend Pay-out ratio)] / [1- {ROE x (1-Dividend Pay-out Ratio)}]

Equity = Equity at the Beginning + (Net Income – Dividend Paid

= $132,5647 + ($27,340 - $4,352)

= $155,535

Return on Equity [ROE]= [Net Income / Equity] x 100

= [$27,340 / $155,535] x 100

= 17.58%

Dividend Payout Ratio = [$4,352 / $27,340] x 100

= 15.92%

Sustainable Growth Rate = [ROE x (1-Dividend Pay-out ratio)] / [1- {ROE x (1-Dividend Pay-out Ratio)}]

= [0.1758 x (1 – 0.1592)] / [1 – {0.1758 x (1 - 0.1592)}]

= [0.1478 / 0.8522]

= 0.1734

= 17.34%

“Hence, the sustainable growth rate for the company would be 17.34%”