Question

Spurlock inc had net income of $266,778 in its most recent fiscal year and total assets of $1,833,400 at the end of the year. The company’s total debt ratio(total debt to total assets) is 35 percent , and spurlock retains 60 percent of its net income every year. What is spurlocks internal growth rate ? What is its sustainable growth rate ?

Answer 1

Spurlock's internal growth rate = ROA * b

b = retention ratio,

ROA = net income/ total assets

= $266,778/ $1833,400

=0.1455

SO, the internal growth rate = 0.1455 * 0.6/ 1 - 0.1455*0.6

=0.0873/ 1 - 0.0873

=0.0873/0.9127

= 9.56%

The total debt/ total assets = 35%,

total debt = 0.35* $1833400

=$641,690

Total assets = debt + equity

or, $1,833,400 = $641,690 + equity

equity = $1,191,710

ROE = Net income/ Equity

= $266,778/ $1,191,710

=0.2238

So, Sustainable growth rate is = ROE * B/ 1 - ROE *B

= 0.2238 * 0.6/ 1 - 0.2238*0.6

=0.13428/ 1 - 0.13428

=0.13428/0.86572

=15.51%.