Andrew's Specialty Store has sales of $200,000, net income of $18,500, total assets of $300,000, and total equity of $250,000. The ﬁrm paid $7,400 in dividends and maintains a constant dividend
Payout ratio. Currently, they are 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 rate of growth can be calculated as:
Sustainable rate of growth = (Net Income / Total Assets) * (1 - Dividend Payout Ratio)

Plugging in the given values, we get:
Sustainable rate of growth = (18,500 / 300,000) * (1 - 7,400 / 200,000) = 0.0483 or 4.83%

To maintain this growth rate, the firm needs to acquire new debt in such a way that the Debt-to-Total Assets ratio remains constant. This can be calculated as:

New Debt = (Sustainable Growth Rate * Total Assets) - Total Equity
New Debt = (0.0483 * $300,000) - $250,000 = $2,323

Therefore, the best choice would be C, as the firm needs to acquire $2,323 of new debt to maintain its sustainable rate of growth without obtaining any additional external equity.

Andrew's Specialty Store Has Sales of $200,000, Net Income of $18,500