Question

The most recent financial statements for Live Co. are shown here:

Income Statement
Sales	$15130
Costs	$11288
Taxable Income	?
Taxes (40%)	?
Net Income	?

Balance Sheet
Current Asset	$12262	Debt	$16278
Fixed Asset	$28304	Equity	?

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 25 percent dividend payout ratio. No external financing is possible.

What is the sustainable growth rate (in %)?

(Enter your answer as a percentage, omit the "%" sign in your response, and round your answer to 4 decimal places. For example, 1.23456% should be entered as 1.2346)

Answer 1

Particulars	Amount	Formula
Sales	$15,130
Costs	$11,288
Taxable Income	$3,842	=Sales - Cost
Taxes (40%)	$1,537	=Taxable Income *40%
Net Income	$2,305	=Taxable income-Taxes

STEP 1: Asset utilization Rate = Total Sales / Total Asset

i.e.{ $15,130 / ($12,262 + $28,304)} = 37.30%

STEP 2: Profitability rate = Net Income / Total Sales

i.e. ($2,305 / $15,130) = 15.24%

STEP 3: Financial Utilization Rate = (Total Debt / Total Equity) or Total Debt / (Total Asset - Total Debt)

i.e. {$16,278 / ($40,566 - $16,278)} = 67.02%

STEP 4: Return on Equity = Step 1 * Step 2 * Step 3

i.e. (37.30% * 15.24% * 67.02%) = 3.8085%

STEP 5: Retention Ratio = 100% - Dividend rate

i.e. 100% - 25% = 75%

STEP 6 = Sustainable Growth rate = Step 4 *Step 5

i.e. 3.8085% * 75% = 2.8564%