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Problem 4-22 Sustainable Growth Rate [LO3] Cambria, Inc., had equity of $175,000 at the beginning of...

Problem 4-22 Sustainable Growth Rate [LO3] Cambria, Inc., had equity of $175,000 at the beginning of the year. At the end of the year, the company had total assets of $330,000. During the year the company sold no new equity. Net income for the year was $37,000 and dividends were $5,000. What is the sustainable growth rate for the company? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Sustainable growth rate % What is the sustainable growth rate if you use the formula ROE × b and beginning of period equity? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Beginning of period equity % What is the sustainable growth rate if you use end of period equity in this formula? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) End of period equity %

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Answer #1

Calculation of sustainable growth rate when begining equity is used

Return on equity = Net income/Equity

= 37,000/175,000

= 21.14%

Dividend payout ratio = Dividend/ Net income

= 5,000/37,000

= 0.1351

Business retention rate = 1 - Dividend payout ratio

= 1 - 0.1351

= 0.8649

Sustainable growth rate = Return on equity x Business retention rate

= 21.14 x 0.8649

= 18.29 %

Calculation of sustainable growth rate when ending equity is used

Ending equity = Equity in the begining + Net income

= 175,000 + 37,000

= $212,000

Return on equity = Net income/Equity

= 37,000/212,000

= 17.45%

Dividend payout ratio = Dividend/ Net income

= 5,000/37,000

= 0.1351

Business retention rate = 1 - Dividend payout ratio

= 1 - 0.1351

= 0.8649

Sustainable growth rate = Return on equity x Business retention rate

= 17.45 x 0.8649

= 15.10 %

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