Question

1) Coventry Comfort, Inc. has equity of $168,500, total assets of $195,000, net income of $63,000, and dividends of $37,800. Calculate the sustainable growth rate?         

2) Delta Ice has a profit margin of 8.3 percent and a payout ratio of 42 percent. The firm has annual sales of $386,400, current liabilities of $37,200, long-term debt of $123,800, and net working capital of $16,700, and net fixed assets of $391,500. No external equity financing is possible. What is the internal growth rate?         

3) SLM, Inc., has annual sales of $40,934, depreciation of $3,100, interest paid of $750, cost of goods sold of $22,400, taxes of $3,084, and dividends paid of $4,060. The firm has total assets of $55,300 and total debt of $32,600. The firm wants to maintain a constant payout ratio but does not want to incur any additional external financing. What is the firm's maximum rate of growth?     

Answer 1

Answer to Question 1:

Return on Equity, ROE = Net Income / Equity
Return on Equity, ROE = $63,000 / $168,500
Return on Equity, ROE = 37.39%

Dividend Payout Ratio = Dividend / Net Income
Dividend Payout Ratio = $37,800 / $63,000
Dividend Payout Ratio = 0.6

Retention Ratio, b = 1 – Dividend Payout Ratio
Retention Ratio, b = 1 – 0.6
Retention Ratio, b = 0.4

Sustainable Growth Rate = [ROE * b] / [1 - ROE * b]
Sustainable Growth Rate = [0.3739 * 0.4] / [1 – 0.3739 *0.4]
Sustainable Growth Rate = 0.1496 / [1-0.1496]
Sustainable Growth Rate = 0.1496 / 0.8504
Sustainable Growth Rate = 0.1759 or 17.59%