The most recent financial statements for Live Co. are shown here: Income Stateme
ID: 2762259 • Letter: T
Question
The most recent financial statements for Live Co. are shown here: Income Statement Balance Sheet Sales $18,000 Current assets $38,814 Debt $38,254 Costs 10,800 Fixed assets 27,160 Equity 27,720 Taxable income $7,200 Total $65,974 Total $65,974 Taxes (34%) 2,448 Net income $4,752 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 28 percent dividend payout ratio. No external equity financing is possible. Required: What is the sustainable growth rate? (Do not round your intermediate calculations.)
a. 5.04 %
b. 5.47 %
c 13.58 %
d.14.08 %
E14.58 %
Explanation / Answer
Rate on equity, ROE = Net Income /Total equity
= $ 4,752/ $ 27,720 = 0.1714
Sustainable growth rate = (ROE x b)/{1-(ROE x b)}
The plowback ratio, b = 1- payout ratio
b = 1 0 .28 =0.72
Sustainable growth rate = [0.1714 x (0.72)] / [1 .1714 x (0.72)]
= 0.12341/1-0.12341
= 0.12341/0.8765
=0.1408 or 14.08 %
Answer : d) 14.08 %