Question

Eagle Sports Supply has the following financial statements. Assume that Eagle’s assets are proportional to its sales.

INCOME STATEMENT, 2019
Sales	$	1,250
Costs		240
Interest		50
Taxes		190
Net income	$	770

BALANCE SHEET, YEAR-END
	2018				2019					2018				2019
Assets	$	4,200			$	4,500			Debt	$	1,400			$	1,500
									Equity		2,800				3,000
Total	$	4,200			$	4,500			Total	$	4,200			$	4,500

a. What is the internal growth rate of Eagle Sports if the dividend payout ratio is fixed at 60% and the equity-to-asset ratio is fixed at 2/3? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Internal growth rate % b. What is the sustainable growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Sustainable growth rate %

Answer 1

a). Internal Growth Rate = ROA * Retention Ratio

= [Net Income / Total Assets] * [1 - Dividend Payout Ratio]

= [$770 / $4,200] * [1 - 0.60]

= 0.1833 * 0.40 = 0.0733, or 7.33%

b). Sustainable Growth Rate = ROE * Retention Ratio

= [Net Income / Total equity] * [1 - Dividend Payout Ratio]

= [$770 / $2,800] * [1 - 0.60]

= 0.275 * 0.40 = 0.11, or 11%