The most recent financial statements for Bello Co. are shown here:

The most recent financial statements for Bello Co. are shown here:

Income Statement				Balance Sheet
Sales	$	19,300		Current assets	$	11,780		Debt	$	15,940
Costs		13,200		Fixed assets		27,900		Equity		23,740
Taxable income	$	6,100		Total	$	39,680		Total	$	39,680
Taxes (21%)		1,281
Net income	$	4,819

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 45 percent dividend payout ratio.

What is the sustainable growth rate?

Answer

Explanation

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.   To calculate the sustainable growth rate, we first need to calculate the ROE, which is:

  

ROE	=	NI/TE
ROE	=	$4,819/$23,740
ROE	=	.2030, or 20.30%

  

The plowback ratio, b, is one minus the payout ratio, so:

  

b	=	1 – .45
b	=	.55

  

Now we can use the sustainable growth rate equation to get:

  

Sustainable growth rate = (ROE × b)/[1 – (ROE × b)]

Sustainable growth rate = [.2030(.55)]/[1 – .2030(.55)]

Sustainable growth rate = .1257, or 12.57%