Question

FSHSH Corporation generated net income of $17,000 on sales of $112,000 in this year. Its equity at the beginning of the year was $340,000 and dividends paid were $5,000. What is the company's sustainable growth rate? please show all work and formulas used in explanation because I cannot figure out how i got .033% as an answer

Answer 1

Ending Equity = Beginning Equity + Net Income - Dividends
Ending Equity = $340,000 + $17,000 - $5,000
Ending Equity = $352,000

Average Equity = (Ending Equity + Beginning Equity) / 2
Average Equity = ($352,000 + $340,000) / 2
Average Equity = $346,000

Return on Equity, ROE = Net Income / Average Equity
Return on Equity, ROE = $17,000 / $346,000
Return on Equity, ROE = 0.04913 or 4.913%

Retention Ratio, b = (Net Income - Dividends) / Net Income
Retention Ratio, b = ($17,000 - $5,000) / $17,000
Retention Ratio, b = 0.7059

Sustainable Growth Rate = [ROE * b] / [1 - ROE * b]
Sustainable Growth Rate = [0.04913 * 0.7059] / [1 - 0.04913 * 0.7059]
Sustainable Growth Rate = 0.03468 / 0.96532
Sustainable Growth Rate = 0.0359 or 3.59%