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 53.8%?  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

The formula to calculate the Sustainable Growth rate is as under,
Sustainable Growth rate = ROE x [1 - Dividend payout ratio]
ROE i.e. Return on equity = Net income / Average Equity
Average equity = [Equity for 2010 + Equity for 2011]/2 = [$99 million + $120 million]/2 = $109.50 million
ROE i.e. Return on equity = $30 million / $109.50 million = 27.40%
Sustainable Growth rate = 27.40% x [1 - 0.538]
Sustainable Growth rate = 12.6