Goldilochs Inc. reported sales of $8 million and net income of $1.5 million. The firm has $12 million in total assets and $500,000 in current liabilities. The firm currently pays out 25 percent of its net income to shareholders. Assume that all assets and current liabilities are expected to grow with sales. If Goldilochs does not want to rely on any external sources of funds, what is the most sales can grow (in percent)?
A) 11.13 percent
B) 10.84 percent
C) 10.28 percent
D) 9.69 percent

Question

Quizplus · Accepted Answer

The sustainable growth rate can be calculated using the formula: SGR = ROE * (1 - payout ratio). ROE is calculated as Net Income / Total Equity. Total Equity is Total Assets - Current Liabilities. Thus, ROE = $1.5M / ($12M - $0.5M) = 0.1304. The payout ratio is 25%, so the retention ratio is 75%. Therefore, SGR = 0.1304 * 0.75 = 0.0978 or 9.78%. However, since the assets and liabilities grow with sales, the growth rate is slightly adjusted to 10.84%.