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Sustainable Growth Rate

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A company had net income of $2000 on sales of $50,000 last year. The company paid a dividend of $500. Total assets were $100,000, of which $40,000 was financed by debt.

a) What is the firm's sustainable growth rate?

b) If the firm grows at its sustainable growth rate, how much debt will be issued next year?

c) What would be the maximum possible rate if the firm did not issue any debt next year?

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A company had net income of $2000 on sales of $50,000 last year. The company paid a dividend of $500. Total assets were $100,000, of which $40,000 was financed by debt.

What is the firm's sustainable growth rate?

The sustainable growth rate (SGR) is the maximum growth rate a firm can achieve without external equity financing while maintaining a constant debt/equity ratio.
Sustainable growth rate = (ROE x b) / [1 - (ROE x b)].

Sales= $50,000
Assets = $100,000
Debt= $40,000
Therefore, Equity= $60,000 =100000-40000

Debt%= 40% =40000/100000
Equity %= 60% =60000/100000

Net Income= $2,000
Dividend= $500
Therefore, retained income= $1,500 =2000-500

ROE =Return on Equity = Net Income / ...

Solution Summary

Calculates the firm's sustainable growth rate, amount of debt to be issued and the maximum possible rate if the firm did not issue any debt next year.

$2.19
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QUESTIONS:
Below are the questions I'm being asked to respond to, but I have no idea how to go about answering them.

Calculate the 2013 internal growth rate and sustainable growth rate for S&S Air. What do these numbers tell you about S&S Air and its ability to grow? Explain.

Prepare a pro forma income statement and pro forma balance sheet for S&S Air for 2014 assuming that the company is operating at full capacity and is planning for a growth rate of 13%. The controller has indicated that he would like the statements prepared with interest expense held constant (i.e. not tied to sales growth) but with depreciation growing with growth in fixed assets. Based on these pro forma statements, calculate the EFN for the company. Is it possible for S&S sales to grow at 13%? Why or why not? Explain.

Prepare a second pro forma income statement and pro forma balance sheet for S&S Air for 2014, again assuming the company is operating at full capacity and is planning for a growth rate of 13%. However, in this case, assume the company has discovered that in order to increase production they must set up an entirely new line, generating a fixed asset expenditure of $5,000,000. Based on these pro forma statements, again calculate the EFN for the company. Why is it different? What effect, if any, will setting up the new line have on capacity utilization for 2014? Explain.

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