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.