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22 November, 23:15

Wilkinson and Daughters has net income of $415,400, total assets of $2.2 million, and total liabilities of $1.08 million. The company paid $270,000 in dividends. What is the firm's sustainable rate of growth?

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  1. 22 November, 23:21
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    The firm's sustainable rate of growth is 12.98%

    Explanation:

    To calculate the firm's sustainable rate of growth we need to make a few steps first.

    1) According to the principles of accounting Total assets=Total liabilities+Total equity

    Total equity hence = (2,200,000-1,080,000) = $1,120,000

    Next, we proceed to calculate the ROE, which is ROE=Net income/equity

    = (415400/1,120,000)

    =0.370892857 (Approx)

    Next we calculate the Dividend payout ratio=Dividend/Net income

    = (270,000/415400)

    =0.649975926

    Next we calculate the Retention ratio=1-Dividend payout ratio

    =1-0.649975926

    =0.350024074

    Finally, with all the steps made before, we are to calculate the

    Sustainable growth rate = (ROE*Retention ratio)

    = (0.370892857*0.350024074)

    =12.98% (Approx).
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