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The most recent financial statements for Bello Co. are shown here: Income Statement Balance Sheet Sales $16,000 Current assets $34,501 Debt $34,003 Costs 9,600 Fixed assets 24,142 Equity 24,640 Taxable income $6,400 Total $58,643 Total $58,643 Taxes (25%) 1,600 Net income $4,800 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 16 percent dividend payout ratio. What is the sustainable growth rate

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abiolataiwo2015

Answer:

24.19%

Explanation:

Calculation for sustainable growth rate

First step to calculate the ROE using this formula

ROE = Net Income / Total Equity

Let plug in the formula

ROE = $4,800 / $24,640

ROE = .1948*100

ROE = 19.48%

Second step is to find the plowback ratio which is b= one minus the payout ratio

b = 1 - .16

b = .84

The last step is to find the Sustainable growth rate using this formula

Sustainable growth rate = (ROE × b) / [1 - (ROE × b)]

Let plug in the formula

Sustainable growth rate = [.1948(.84)] / [1 - .1948(.84)]

Sustainable growth rate=0.163632/(0.8052*0.84)

Sustainable growth rate=0.163632/0.676368

Sustainable growth rate=0.2419*100

Sustainable growth rate = 24.19%

Therefore sustainable growth rate will be 24.19%

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