Flo's Flowers has annual sales of $61,888, depreciation of $8,100, interest paid of $970, cost of goods sold of $29,400, taxes of $4,918, and dividends paid of $4,810. The firm has total assets of $105,300 and total debt of $51,600. The firm does not want any additional external equity financing and also wants to maintain a constant debt-equity ratio. What rate of growth can this firm maintain?

Question

Quizplus · Accepted Answer

Using the sustainable growth rate formula:

Sustainable Growth Rate = (Net Income / Total Assets) * (1 - Dividend Payout Ratio) * (1 + Debt/Equity Ratio * Interest Expense)
where,

Net Income = Sales - COGS - Depreciation - Taxes = 61,888 - 29,400 - 8,100 - 4,918 = 19,470 
Dividend Payout Ratio = Dividends / Net Income = 4,810 / 19,470 = 0.247 
Debt/Equity Ratio = Total Debt / Total Equity = 51,600 / (105,300 - 51,600) = 1.5 
Interest Expense = 970

Sustainable Growth Rate = (19,470 / 105,300) * (1 - 0.247) * (1 + 1.5 * 970 / 19,470) = 0.3422 or 34.22%

Therefore, the firm can maintain a growth rate of 34.22% if it wants to maintain a constant debt-equity ratio and not seek external equity financing.

Flo's Flowers Has Annual Sales of $61,888, Depreciation of $8,100