Question

Cambria, Inc., had equity of $145030 at the beginning of the year. At the end of the year, the company had total assets of $257047. During the year the company sold no new equity. Net income for the year was $26493 and dividends were $4982.

What is the sustainable growth rate for the company? (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

Solution -

Opening shareholders equity = $1,45,030

Net income = $26,493

Dividends = $4982

Retained earnings = $26,493 - $4,982= 21,511

Closing shareholders equity = opening shareholders equity + retained earnings

Closing shareholders equity = $1,45,030+$21,511= $1,66,541

Dividend pay out ratio = Dividend payment / Net income

Dividend pay out ratio= $4982/26493=0.1880

Sustainable growth rate= Return on equity *(1- Dividend payout ratio)

Sustainable growth rate = Net income / Shareholders Equity * ( 1- dividend payout ratio)

Calculation of sustainable growth rate using closing shareholders Equity

SGR= (26,493/1,66,541)*(1-0.1880)

Sustainable growth rate = 26,493/1,66,541*0.8120= 12.9171

Calculation of sustainable growth rate using opening shareholders equity

Sustainable Growth Rate= (26,493/1,45,030)*0.8120=14.8330