Question

Check my work Problem 18-16 Feasible Growth Rates (L03) Eagle Sports Supply has the following financial statements. Assume that Eagle's assets are proportional to its sales INCOME STATEMENT, 2019 Sales $1,eee Costs 190 Interest Taxes Net income $ 600 140 2018 3,450 Assets $ BALANCE SHEET, YEAR-END 2019 $ 3,750 Debt Equity $ 3,758 Total $ $ 2018 1.150 2,3ee 3,450 2019 1.250 2.500 3,750 Total $ 3,450 $ $ a. What is the internal growth rate of Eagle Sports If the dividend payout ratio is fixed at 70% 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.)

Answer 1

1. internal growth rate (g) = b×ROA/[1-(b×ROA)]

b = retention ratio = 1-0.7 = 0.3

ROA = Return on Asset = Net Income/ (beginning + ending of period assets )
= 600/[(3450+3750)/2]
= 16.6667 %

internal growth rate (g) = 0.3×16.6667 % /[1-(0.3×16.6667)]
= 5.26% (answer)

2.Sustainable growth rate = return on equity x retention ratio

Return on equity = net income/total equity = 600/2500

b= 0.3

Sustainable growth rate = (600×0.3)/2500
=7.2% (answer)