The most recent financial statements for Mandy Company are shown below:
Income Statement
Sales $94,200
Costs 67,650
Taxable income $ 26,550
Tax (21%) 5,576
Net Income $ 20,974

Balance Sheet
Current assets $ 34,500
Fixed assets 94,700
Total $ 129,200  

Debt $ 45,000
Equity 84,200
Total $ 129,201


Assets and costs are proportional to sales. Debt and equity are not. The company maintains
a constant 40 percent dividend payout ratio. No external equity financing is possible. What is the sustainable growth rate?

To determine the **Sustainable Growth Rate (SGR)** for Mandy Company, we can use the formula based on the retention ratio and return on equity (ROE):

\[
\text{SGR} = \dfrac{\text{ROE} \times \text{Retention Ratio}}{1 - (\text{ROE} \times \text{Retention Ratio})}
\]

Where:

- **ROE** (Return on Equity) = $\dfrac{\text{Net Income}}{\text{Equity}}$
- **Retention Ratio** = 1 - Dividend Payout Ratio

### Step 1: Calculate Return on Equity (ROE)
The Return on Equity is calculated as:

\[
\text{ROE} = \dfrac{\text{Net Income}}{\text{Equity}} = \dfrac{20,974}{84,200} \approx 0.2491 \text{ or } 24.91\%
\]

### Step 2: Calculate Retention Ratio
The Retention Ratio is the proportion of net income that is retained in the business rather than paid out as dividends. This can be calculated as:

\[
\text{Retention Ratio} = 1 - \text{Dividend Payout Ratio} = 1 - 0.40 = 0.60
\]

### Step 3: Apply the Sustainable Growth Rate Formula
Now that we have both ROE and the Retention Ratio, we can use the formula to find the Sustainable Growth Rate:

\[
\text{SGR} = \dfrac{0.2491 \times 0.60}{1 - (0.2491 \times 0.60)}
\]

\[
\text{SGR} = \dfrac{0.14946}{1 - 0.14946} = \dfrac{0.14946}{0.85054} \approx 0.1757 \text{ or } 17.57\%
\]

### Conclusion:
The **sustainable growth rate** for Mandy Company is approximately **17.57%**.

Would you like further details or have any questions?

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Here are some related questions you might find useful:

1. How does the retention ratio affect the sustainable growth rate?
2. What are the implications if a company’s actual growth exceeds the sustainable growth rate?
3. How does the use of debt affect the sustainable growth rate?
4. What if the company’s dividend payout ratio changes—how would that impact growth?
5. What’s the difference between internal and external growth rates for a company?

**Tip:** To increase sustainable growth, a company can retain more earnings, improve return on equity, or efficiently manage its assets.

The most recent financial statements for Mandy Company are shown below: Income Statement Sales $94,200 Costs 67,650 Taxable income $ 26,550 Tax (21%) 5,576 Net Income $ 20,974 Balance Sheet Current assets $ 34,500 Fixed assets 94,700 Total $ 129,200 Debt $ 45,000 Equity 84,200 Total $ 129,201 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 40 percent dividend payout ratio. No external equity financing is possible. What is the sustainable growth rate?

Learn how to calculate the Sustainable Growth Rate (SGR) for Mandy Company with detailed financial statements, including sales, costs, net income, equity, and a 40% dividend payout ratio. Understand key concepts such as ROE and retention ratio for business students.

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