Question

Sourstone, Inc., had total assets of $304,000 and equity of $195,000 at the beginning of the year. At the end of the year, the company had total assets of $329,000. During the year, the company sold no new equity. Net income for the year was $109,000 and dividends were $52,500. What is the sustainable growth rate if you calculate ROE based on the end-of-period equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) What is the sustainable growth rate if you calculate ROE based on the beginning-of-period equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

1.Sustainable growth rate if ROE is calculated ,based on the end-of-period equity

Sustainable growth rate(SGR)=ROE*Retention ratio

SGR= (Net Income/End-of-period Total equity)*((Net Income-Dividends)/Net Income)

ie. (109000/251500)*((109000-52500)/109000)

22.47%

2.Sustainable growth rate if ROE is calculated ,based on the beginning-of-period equity

Sustainable growth rate=ROE*Retention ratio

SGR= (Net Income/Beginning-of-period Total equity)*((Net Income-Dividends)/Net Income)

ie. (109000/195000)*((109000-52500)/109000)

28.97%

Answer 2

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