Question

Given the financial information provided below

TJ Max Inc.
Selected financial information ($thousands)
		2016	2017
	Sales	$876.52	$1,088.46
	Net Income	34.84	25.76
	Total Assets	697.16	982.63
	Equity	433.6	457.14
	Dividends	1.65	2.22

What is the difference between TJ Max’s sustainable growth rate and its actual growth rate for 2017, that is “sustainable growth rate – actual growth rate”?
(Points : 3.5)

       -18.75%.
       -11.40%.
       21.40%.
       7.09%.
       13.98%.

Answer 1

Return on equity = Net Income / Total equity

= $34.84 / $876.52

= 3.97%

Return on equity is 3.97%.

Retention ratio = ($34.84 - $1.65) / $34.84

= $33.19 / $34.84

= 95.26%

Retention ratio is 95.26%

Retention ratio is 95.26%.

Sustainable growth rate = Retention ratio × Return on equity

= 95.26% × 3.97%

= 3.79%

Sustainable growth rate is 3.79%.

Actual Growth rate = ($1,088.46 - $876.52) / $876.52

= 24.18%

Actual Growth rate is 24.18%.

Difference in growth rate = 3.79% - 25.18%

= 21.40%

Difference in growth rate is 21.40%.

Option (C) is correct answer.