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During the year, the Senbet Discount Tire Company has gross sales of $1.3million. The firm’s cost...

During the year, the Senbet Discount Tire Company has gross sales of $1.3million. The firm’s cost of goods sold and the selling expenses were $450,000 and $225,000, respectively. Senbet also has interest expenses of $150,000. Depreciation was $110,000. Senbet’s tax rate was 35 percent. The company has a total equity of $2 million.
a. What was Senbet’s net income? (8 points)

b. What was Senbet’s operating cash flow? (3 points)

c. If the company paid out $100,000 as dividends, what was the dividend payout ratio, retention ratio? (3 points)
d. What was Senbet’s ROE? (3 points)
e. What was Senbet’s sustainable growth rate? (3 points
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Answer #1

Income statement for Senbet Discount Tire company:

Particulars $ (000)
Gross sales 1,300
(-) Cost of goods sold (450)
Gross Profit 850
(-) Selling Expenses (225)
EBITDA 625
(-) Depreciation (110)
EBIT 515
(-) Interest (150)
Income before taxes 365
(-) Taxes at 35% (127.75)
Net Income 237.25

a. Senbet net income = $2.3725 million ($2,372,500)

b. Operating cash flow = Net Income + Interest + Depreciation

Operating cash flow = 237.25 + 150 + 110

Operating cash flow = $497.25 = $4,972,500

c. Dividend payout ratio = Dividends / Net Income

Dividend Payout ratio = 100 / 237.25 = 42.15%

d. ROE = Net Income / Equity

ROE = 237.25 / 2000 = 11.8625%

e. Sustainable growth rate = ROE * (1 - Dividend payout ratio)

Sustainable growth rate = 11.8625% * (1 - 42.15%)

Sustainable growth rate = 11.8625% * 53.85% = 6.39%

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