Westcomb,Inc.had equity of $150,000 at the beginning of the year.At the end of the year,the company had total assets of $195,000.During the year,the company sold no new equity.Net income for the year was $72,000 and dividends were $44,640.What is Westcomb's sustainable growth rate?

Question

Quizplus · Accepted Answer

The sustainable growth rate can be calculated using the formula: Sustainable Growth Rate = ROE * (1 - Dividend Payout Ratio), where ROE (Return on Equity) = Net Income / Equity at the beginning of the year, and Dividend Payout Ratio = Dividends / Net Income. First, calculate the ROE: ROE = $72,000 / $150,000 = 0.48 or 48%. Then, calculate the Dividend Payout Ratio: Dividend Payout Ratio = $44,640 / $72,000 = 0.62 or 62%. Therefore, the Sustainable Growth Rate = 0.48 * (1 - 0.62) = 0.48 * 0.38 = 0.1824 or 18.24%.