Question

You've collected the following information about Molino, Inc.: $200,000 Sales Net income $ 14,000 Dividends $ 9,000 Total debt $80,000 Total equity $62,000 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.) a. Sustainable growth rate b. Additional borrowing c. Internal growth rate

Answer 1

a. Return on Equity = Net Income / Equity
= $14000 / 62000 = 22.58%
Retention Ratio = 1 - (9000/14000) = 35.71%

Sustainable Growth rate = (ROE x Retention Ratio) / (1- ROE x Retention Ratio)
= (0.2258 x 0.3571) / (1-0.2258 x 0.3571) = 8.77%

b. New Total Asset = (Total Debt + Total Equity) x (1+g)
= ($80000+62000) x (1+0.0877) = $154453.4

New Debt = $154453.4 x 80000 / (80000+62000) = $87016
Increase in Borrowing = $87016 - 80000 = $7016

c. ROA = $14000 / (62000+80000) = 9.86%

Growth rate = (0.0986 x 0.3571) / (1-0.0986 x 0.3571) = 3.65%