| The most recent financial statements for Schenkel Co. are shown here: |
| Income Statement | Balance Sheet | ||||||||||
| Sales | $ | 16,800 | Current assets | $ | 12,400 | Debt | $ | 16,900 | |||
| Costs | 10,600 | Fixed assets | 30,000 | Equity | 25,500 | ||||||
| Taxable income | $ | 6,200 | Total | $ | 42,400 | Total | $ | 42,400 | |||
| Taxes (40%) | 2,480 | ||||||||||
| Net income | $ | 3,720 | |||||||||
| Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 30 percent dividend payout ratio. No external equity financing is possible. |
| What is the sustainable growth rate? |
Answer: Sustainable growth rate = 11.37%
Working notes for the above answer
The maximum percentage sales increase is the sustainable growth rate.
To calculate the sustainable growth rate, we first need to calculate the ROE, which is:
ROE
= NI / TEROE
= $3720 / $25500
ROE = .1458 or 14.58 %
The plowback ratio, b, is one minus the payout ratio, so:
b = 1 − .30b
= .70
Now we can use the sustainable growth rate equation to get:
Sustainable growth rate
= (ROE × b) / [1 − (ROE × b)]
Sustainable growth rate
= [.1458(.70)] / [1 − .1458(.70)]
Sustainable growth rate = .1137 or 11.37%
