Question

For the most recent fiscal year, the Hammock Company’s total equity was $450 and net income was equal to $97. Of the $97 net income, $44 was retained. What is the sustainable growth rate for the Ladder Company?

Answer 1

To calculate the sustainable growth rate (SGR) for Hammock Company, we can use the formula for SGR, which is given by:

\[
\text{SGR} = \text{Retention Ratio} \times \text{Return on Equity (ROE)}
\]

1. **Calculate the Retention Ratio:**
The retention ratio is the proportion of net income retained in the business, calculated as:

\[
\text{Retention Ratio} = \frac{\text{Retained Earnings}}{\text{Net Income}} = \frac{44}{97} \approx 0.4546
\]

2. **Calculate Return on Equity (ROE):**
ROE is calculated by dividing net income by total equity:

\[
\text{ROE} = \frac{\text{Net Income}}{\text{Total Equity}} = \frac{97}{450} \approx 0.2156
\]

3. **Calculate the Sustainable Growth Rate (SGR):**
Now that we have the retention ratio and ROE, we can plug these values into the SGR formula:

\[
\text{SGR} = \text{Retention Ratio} \times \text{ROE}
\]

\[
\text{SGR} = 0.4546 \times 0.2156 \approx 0.098
\]

To express SGR as a percentage, multiply by 100:

\[
\text{SGR} \approx 9.8\%
\]

Thus, the sustainable growth rate for Hammock Company is approximately **9.8%.**