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 correct answer is A.The sustainable growth rate is given by the formula:```g = (ROE * b) / (1 - b)```where:* ROE is the return on equity* b is the dividend payout ratioIn this case, the ROE is 14,400 / 200,000 = 0.072, and the dividend payout ratio is 5,760 / 14,400 = 0.4. Therefore, the sustainable growth rate is:```g = (0.072 * 0.4) / (1 - 0.4) = 0.048```The new total debt that the firm must acquire is given by the formula:```ΔD = g * (TA - E)```where:* ΔD is the change in total debt* g is the sustainable growth rate* TA is the total assets* E is the total equityIn this case, the total assets are $280,000 and the total equity is $200,000. Therefore, the new total debt that the firm must acquire is:```ΔD = 0.048 * (280,000 - 200,000) = $3,612```

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