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CHAPTER 4-8

# CHAPTER 4-8 - So the equity at the end of the year was...

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So, the equity at the end of the year was: Ending equity = \$135,000 + 16,500 Ending equity = \$151,500 The ROE based on the end of period equity is: ROE = \$19,000 / \$151,500 ROE = .1254 or 12.54% The plowback ratio is: Plowback ratio = Addition to retained earnings/NI Plowback ratio = \$16,500 / \$19,000 Plowback ratio = .8684 or 86.84% Using the equation presented in the text for the sustainable growth rate, we get: Sustainable growth rate = (ROE × b) / [1 – (ROE × b)] Sustainable growth rate = [.1254(.8684)] / [1 – .1254(.8684)] Sustainable growth rate = .1222 or 12.22% The ROE based on the beginning of period equity is ROE = \$16,500 / \$135,000 ROE = .1407 or 14.07% Using the shortened equation for the sustainable growth rate and the beginning of period ROE, we get: Sustainable growth rate = ROE × b Sustainable growth rate = .1407 × .8684 Sustainable growth rate = .1222 or 12.22% Using the shortened equation for the sustainable growth rate and the end of period ROE, we get: Sustainable growth rate = ROE × b Sustainable growth rate = .1254 × .8684 Sustainable growth rate = .1089 or 10.89% Using the end of period ROE in the shortened sustainable growth rate results in a growth rate that

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CHAPTER 4-8 - So the equity at the end of the year was...

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