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Sustainable Growth Rate

17. Plank's Plants had net income of $2,000 on sales of $50,000 last year. The firm 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 growth rate if the firm did not issue any debt next year?

A firm's profit margin is 10 percent and its asset turnover ratio is .6. It has no debt, has net income of $10 per share, and pays dividends of $4 per share. What is the sustainable growth rate?

Solution Preview

Plank's Plants had net income of $2,000 on sales of $50,000 last year. The firm 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?
Assets = $100,000
Debt = $40,000
Therefore, Equity = $100,000 - $40,000 = $60,000

Sustainable growth rate = ROE x b / (1-ROE x b)

Where ROE is return on equity = Net Income / Equity = $ 2,000 / $60,000 = 3.3333%
b = plowback ratio = ($2,000-$500 ) / $2,000 = ...

Solution Summary

Answers to questions on sustainable growth rate, internal growth rate.

$2.19