Guido's Garden Supplies has sales of $180,000, net income of $14,400, total assets of $280,000, total equity of $200,000, and paid $5,760 in dividends. The firm maintains a constant dividend payout ratio. The firm is currently operating at full capacity. All costs and assets vary directly with sales. The firm does not want to obtain any additional external equity. At the sustainable rate of growth, how much new total debt must the firm acquire?

Question

Quizplus · Accepted Answer

The sustainable growth rate is:g = (Net income - Dividends) / Total equity= ($14,400 - $5,760) / $200,000= 0.0432The new total debt must be:New total debt = (Sustainable growth rate * Total assets) - (Net income - Dividends)= (0.0432 * $280,000) - $14,400 + $5,760= $3,612

Guido's Garden Supplies Has Sales of $180,000, Net Income of $14,400