Question

You've collected the following information about Molino, Inc. Sales $215,000 Net income $ 17,300 Dividends $ 9,400 Total debt $77,000 Total equity $59.000 38:44 ces a. What is the sustainable growth rate for the company? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If it does grow at this rate, how much new borrowing will take place in the coming year, assuming a constant debt-equity ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g. 32.16.) c. What growth rate could be supported with no outside financing at all? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. Sustainable growth rate Additional borrowing C. Internal growth rate

Answer 1

a.
Sustainable growth rate	(ROE*b)/[(1-(ROE*b)]
ROE refers to return on equity	Net income/Total equity
b refers to retention ratio	1-payout ratio
Payout ratio	Dividend/Net income
Calculation of sustainable growth rate is shown below
ROE	17300/59000
ROE	29.32%
Payout ratio	9400/17300
Payout ratio	54.34%
Retention ratio	1-54.34%
Retention ratio	45.66%
Sustainable growth rate	(29.32%*45.66%)/[(1-(29.32%*45.66%))
Sustainable growth rate	15.46%
b.
Calculation of new borrowing with constant debt equity ratio
New debt	Debt ratio*New total assets
New total assets	(77000+59000)*(1.1546)
New total assets	$157,025.44
Debt ratio	77000/(77000+59000)
Debt ratio	0.57
New debt	157025.44*0.57
New debt	$88,904.11
Additional borrowings	88904.11-77000
Additional borrowings	$11,904.11
c.
Calculation of internal growth rate
Internal growth rate	(ROA*b)/(1-(ROA*b))
ROA represents return on assets	Net income/Total assets
Return on assets	17300/(77000+59000)
Return on assets	12.72%
Internal growth rate	(12.72%*45.66%)/(1-(12.72%*45.66%))
Internal growth rate	6.17%
Thus, with growth rate of 6.17% company will not require additional financing