Question

Medtronic firm has $66,000,000 in equity and $60,000,000 in debt
and forecast $25,000,000 in net income for the year. It currently pays
dividends equal to 14% of its net income.

a. What would their internal growth rate be?

b. What would their sustainable growth rate be?

Answer 1

a]

Internal growth rate (IGR) = retention ratio * return on assets

total assets = debt + equity = $60,000,000 + $66,000,000 = $126,000,000

retention ratio = 1 - payout ratio = 1 - 14% = 86%

Return on assets = net income / total assets = ($25,000,000 / $126,000,000)

Internal growth rate (IGR) = 86% * ($25,000,000 / $126,000,000)

Internal growth rate (IGR) = 17.06%

b]

Sustainable growth rate (SGR) = return on equity * retention ratio

Return on equity = net income / total equity = ($25,000,000 / $66,000,000)

Sustainable growth rate (SGR) = ($25,000,000 / $66,000,000) * 86%

Sustainable growth rate (SGR) = 32.58%