Question

You’ve collected the following information about Odyssey, Inc.:

Sales		$	209137
Net income		$	14526
Dividends		$	3887
Total debt		$	55951
Total equity		$	68786

If the company grows at the sustainable growth rate, how much new borrowing will take place in the coming year, assuming a constant debt–equity ratio?

(Omit the "$" sign and commas in your response. Enter your answer rounded to 2 decimal places. For example, $1,200.456 should be entered as 1200.46.)

Answer 1

Retention ratio b = 1 - dividend payout ratio = 1 - ( 3,887 / 14,526) = 0.7324.

ROE = 14,526 / 68,786 = 0.2118

Sustainable growth rate = ROE x b / ( 1 - ROE x b ) = 0.2118 x 0.7324 / ( 1 - 0.2118 x 0.7324) = 0.1551 / ( 1 - 0.1551) = 0.1551 / 0.8449 = 0.1836 or 18.36 %.

Debt equity ratio = 55,951/ 68,786 = 0.8134 or 81.34 %

If the company grows at the sustained growth rate,

Total assets = 1.1836 ( 55,951 + 68,786 ) = 147,639.

New debt = [ 55,951 / ( 55,951 + 68,786) ] * 147,639 = 55,951 / 124,737 * 147,639 = 66,223.73.

Additional borrowing = 66,223.73 - 55,951 = 10,272.73.