Question

Suppose a firm has following information: nSales:$245,000; NI:$17,000; Dividend:$5,800; Total Debt: $53,000; Total Equity: $84,000. What...

Suppose a firm has following information:

nSales:$245,000; NI:$17,000; Dividend:$5,800; Total Debt: $53,000; Total Equity: $84,000.

What is the sustainable growth rate?

If the company wants a 20% growth rate but still maintain its debt-to-equity rate? Is this possible without issuing new equity? How much new equity need to be issued?

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Answer #1

Sustainable Growth rate = retention Ratio * Return on Equity

SGR is basically the rate of growth that a firm on a long term basis. SGR is dependent on two components - retention ratio and return on equity.

Given the information, SGR = 13.31%

If the company wants growth rate as 20%, The company can choose to increase the retention ratio without changing the D/E ratio. Therefore, reduce the dividend payments keeping D/E constant.

calculation for SGR -

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