The most recent financial statements for Bello Co. are shown here:

The most recent financial statements for Bello Co. are shown here:

Income Statement				Balance Sheet
Sales	$	19,800		Current assets	$	11,880		Debt	$	16,240
Costs		13,500		Fixed assets		30,150		Equity		25,790
Taxable income	$	6,300		Total	$	42,030		Total	$	42,030
Taxes (24%)		1,512
Net income	$	4,788

Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 35 percent dividend payout ratio.

What is the sustainable growth rate?

Answer

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.   To calculate the sustainable growth rate, we first need to calculate the ROE, which is:

  

ROE	=	NI/TE
ROE	=	$4,788/$25,790
ROE	=	.1857, or 18.57%

  

The plowback ratio, b, is one minus the payout ratio, so:

  

b	=	1 – .35
b	=	.65

  

Now we can use the sustainable growth rate equation to get:

  

Sustainable growth rate = (ROE × b)/[1 – (ROE × b)]

Sustainable growth rate = [.1857(.65)]/[1 – .1857(.65)]

Sustainable growth rate = .1372, or 13.72%