at this rate, how much new borrowing will take place in the coming year, assuming a constant debt-equity ratio? What growth rate could be supported with no outside financing at all?
21 To calculate the sustainable growth rate, we first must calculate the retention ratio and ROE. The retention ratio is: b = 1 – $9,300 / $17,500 b = 0.4686 And the ROE is: ROE = $17,500 / $58,000 ROE = 0.3017 or 30.17% So, the sustainable growth rate is: Sustainable growth rate = (ROE × b) / [1 – (ROE × b)] Sustainable growth rate = [0.3017(.4686)] / [1 – 0.3017(0.4686)] Sustainable growth rate = 0.1647 or 16.47% If the company grows at the sustainable growth rate, the new level of total assets is: New TA = 1.1647($86,000 + 58,000) = $167,710.84 To find the new level of debt in the company’s balance sheet, we take the percentage of debt in the capital structure times the new level of total assets. The additional borrowing will be the new level of debt minus the current level of debt. So: New TD = [D / (D + E)](TA) New TD = [$86,000 / ($86,000 + 58,000)]($167,710.84) New TD = $100,160.64
And the additional borrowing will be: Additional borrowing = $100,160.04 – 86,000 Additional borrowing = $14,160.64 The growth rate that can be supported with no outside financing is the internal growth rate. To calculate the internal growth rate, we first need the ROA, which is: ROA = $17,500 / ($86,000 + 58,000) ROA = 0.1215 or 12.15% This means the internal growth rate is: Internal growth rate = (ROA × b) / [1 – (ROA × b)] Internal growth rate = [0.1215(0.4686)] / [1 – 0.1215(.4686)] Internal growth rate = 0.0604 or 6.04%