Donaldson and Heirs has a net income of 238000 total assets

Donaldson and Heirs has a net income of $238,000, total assets of $1,784,000, and total

        liabilities of $437,000. The company paid $66,640 in dividends. What is the firm’s sustainable rate of growth?

SHOW WORK

Solution

Return on equity (ROE):

= Net income/Total equity

= $238,000/($1,784,000-$437,000)

= 17.67%

Retention ratio:

= ($238,000-$66,640)/$238,000

= 72%

Sustainable growth rate = ROE×Retention ratio÷(1-ROE×Retention ratio)

= 17.67%×72%÷(1-17.67%×72%)

= 14.58%

Hence, sustainable growth rate is 14.58%