Question

Given the financial statements below for Dragonfly Enterprises, what would be the sustainable growth rate (SGR)...

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

Homework Answers

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
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