FAJAR KRISTANTO G P 041411331020

MADE KARTIKA D U 041411331072

PUTRI ROUDINA M
041411331084
SINDY FIRDAUZI
041411331157

Presentation Title
FPPT.com

22. Sustainable Growth and

Outside Financing
Youve collected the following information about St.
Pierre, Inc.:

Sales _ $195,000
Net income _ $17,500
Dividends _ $9,300
Total debt _ $86,000
Total equity _ $58,000

What is the sustainable growth rate for St. Pierre,

Inc.? If it does grow at this rate,
How much new borrowing will take place in the
coming year, assuming a constant debtequity ratio?
What growth rate could be supported with no outside
financing at all?

SOLUTION

 If the company grows at the sustainable growth

rate, the new level of total assets is:
New TA = 1.1647($86,000 + 58,000) =
$167,710.84
To find the new level of debt in the companys
balance sheet, we take the percentage of debt in
the capital structure times the new level of total
assets.
The additional borrowing will be the new level of
debt minus the current level of debt.
So :

 the additional borrowing will be:

Additional borrowing = $100,160.04
86,000
Additional borrowing = $14,160.64
The growth rate that can be supported
with no outside financing is the internal
growth rate. To calculate the internal
growth rate, we first need the ROA,
which is:

This means the internal growth rate is:

23. Sustainable Growth Rate

Coheed, Inc., had equity of $135,000 at the
beginning of the year. At the end of the year, the
company had total assets of $250,000. During
the year the company sold no new equity. Net
income for the year was $19,000 and dividends
were $2,500.
What is the sustainable growth rate for the
company?
What is the sustainable growth rate if you use the
formula ROE _ b and beginning of period equity?
What is the sustainable growth rate if you use end
of period equity in this formula? Is this number too
high or too low? Why?

SOLUTION

Sustainable Growth Rate using

ROE X b and Beginning of Period
Equity

c. Sustainable Growth Rate using

ROE X b and Ending of Period Equity

d. Is This Number too High or

too Low. Why?
Using the end of period ROE in the
shortened sustainable growth rate results
in a growth rate that is too low. This will
always occur whenever the equity
increases.
If equity increases, the ROE based on end
of period equity is lower than the ROE
based on the beginning of period equity.
The ROE (and sustainable growth rate) in
the abbreviated equation is based on
equity that did not exist when the net
income was earned.

24. Internal Growth Rates

Calculate the internal growth rate for
the company in the previous
problem.
Now calculate the internal growth
rate using ROA x b for both
beginning of period and end of period
total assets.
What do you observe?

SOLUTION
To calculate beginning of period assets :
Beginning assets = Ending assets Addition to
retained earnings
Beginning assets = $250,000 16,500
Beginning assets = $233,500

So the ROA using beginning of period

assets is:

 The ROA using end of period assets is:

Internal growth rate

Internal growth rate using

ROA x b
Beginning Period

Ending Period

25. Calculating EFN

The most recent financial statements for
Moose Tours, Inc., follow. Sales for 2009
are projected to grow by 20 percent.
Interest expense will remain constant; the
tax rate and the dividend payout rate will
also remain constant. Costs, other
expenses, current assets, and accounts
payable increase spontaneously with
sales. If the fi rm is operating at full
capacity and no new debt or
equity is issued, what external fi nancing is
needed to support the 20 percent growth