Question

You’ve collected the following information about Odyssey, Inc.: Sales $ 207748 Net income $ 10537 Dividends $ 4301 Total debt $ 87359 Total equity $ 62684 If the company grows at the sustainable growth rate, how much new borrowing will take place in the coming year, assuming a constant debt–equity ratio?

Answer #1

Retention ratio(b) = 1 - 4301/10537 = 0.5918

ROE = Net Income/ Equity = 10537/62684 = 16.8097%

Sustainable Growth Rate = ROE*b/(1-ROE*b) =
16.8097%*0.5918/(1-0.5918*16.8097%) = 11.0469%

New Total Assets = (1+Growth rate)* (Debt + equity ) =
(1+11.0469%)*(87359+62684) = 166,618.14

New Total Debt = Debt/(Debt+Equity) * Total Assets =
87359/(87359+62684) * 166,618.14 = 97009.48

New borrowings = 97009.48 - 87359 = 9650.48

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