Using the sustainable growth rate equation and solving for ROE we get

Using the sustainable growth rate equation and

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Using the sustainable growth rate equation and solving for ROE, we get: Sustainable growth rate = (ROE × b) / [1 – (ROE × b)] .12 = [ROE(.70)] / [1 – ROE(.70)] ROE = .1531 or 15.31% Now we can use the DuPont identity to find the profit margin as: ROE = PM(TAT)(EM) .1531 = PM(1 / 0.75)(1 + 1.20) PM = (.1531) / [(1 / 0.75)(2.20)] PM = .0522 or 5.22% 10
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#5. You’ve collected the following information about St. Pierre, Inc,: Sales = $195,000 Net income = $17,500 Dividends = $9,300 Total debt = $86,000 Total equity = $58,000 What is the sustainable growth rate for St. Pierre, Inc.? If it does grow 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? 11
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1) 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 = .4686 And the ROE is: ROE = $17,500 / $58,000 ROE = .3017 or 30.17% So, the sustainable growth rate is: Sustainable growth rate = (ROE × b) / [1 – (ROE × b)] Sustainable growth rate = [.3017(.4686)] / [1 – .3017(.4686)] Sustainable growth rate = .1647 or 16.47% 12
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2) If the company grows at the sustainable growth rate, the new level of total assets is: New TA = 1.1647($86,000 + 58,000) = $167,716.8 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)]($167,716.8) New TD = $100,164.2 Additional new borrowing = 100,160.64 - 86,000 = $14,160.64 Or Quick Way: = 0.1647 x 86,000 = $14,164.20
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3) ITG ROA Internal Growth Rate = 14
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#6. U-Dunno Corporation's Balance Sheet and Income Statement are as shown below. Note that the firm maintains a cash balance as
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