You will prepare and submit a term paper on Financial statements analysis and financial models(question answers). Your paper should be a minimum of 750 words in length. a company, without seeking for debt finance, the following are two ways a company can adopt in order to increase the sustainable growth rate: first, the utility rate of assets should be increased in order to increase the revenue generated, thus, increase the net income. An increase in the net income increases both the ROE and the payout ratio. Second, the company can depend on either retained earnings or equity finance to fund the undertakings of projects with positive net present value.
ROE = Profit margin*Total asset turnover*equity multiplier = (0.55*1.9*0.063) = 6.5835%. Sustainable growth = (ROE*b)/1- (ROE*b). 0.09 = (0.065835b)/ 1 – (0.065835b). b = 1.2546 = (1 – payout ratio). Therefore, payout ratio = (1.2546 – 1) = 25.46%. Consequently, for the growth rate to be achieved, the dividend payout ratio must be 25.46%. The interpretation means that the company will use 25.46% of the net income to fund dividend payment.
The approximate sustainable growth rate SGR = (ROEb)/1- (ROEb). ROE = (Net income/equity) = (95,000/230,000) = 41.30%. The payout ratio = (42,000/95,000) = 44.21%. Therefore, SGR = (0.413*0.4421)/1 – (0.413* 0.4421) = 0.1826/ (1- 0.1826) = 22.34%. The exact sustainable growth rate = 22.339124%. Since the value of equity never changed during the period, the ROE is remains unchanged.