You’ve collected the following information about Odyssey, Inc.:

Sales		$	235,000
Net income		$	15,400
Dividends		$	9,700
Total debt		$	94,000
Total equity		$	69,000

What is the sustainable growth rate for the company? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Sustainable growth rate

%

If it does grow at this rate, how much new borrowing will take place in the coming year, assuming a constant debt–equity ratio? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Additional borrowing

$

What growth rate could be supported with no outside financing at all? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Internal growth rate

%

Explanation:

To calculate the sustainable growth rate, we first must calculate the retention ratio and ROE. The retention ratio is:

b	=	1 – $9,700 / $15,400
b	=	0.3701

And the ROE is:

ROE	=	$15,400 / $69,000
ROE	=	0.2232, or 22.32%

So, the sustainable growth rate is:

Sustainable growth rate	=	(ROE × b) / [1 – (ROE × b)]
Sustainable growth rate	=	[0.2232(0.3701)] / [1 – 0.2232(0.3701)]
Sustainable growth rate	=	0.0900, or 9.00%

If the company grows at the sustainable growth rate, the new level of total assets is:

New TA = 1.0900($94,000 + 69,000) = $177,677.73

To find the new level of debt in the company’s 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:

New TD	=	[D / (D + E)](TA)
New TD	=	[$94,000 / ($94,000 + 69,000)]($177,677.73)
New TD	=	$102,464.46

And the additional borrowing will be:

Additional borrowing = $102,464.46 – 94,000

Additional borrowing = $8,464.45

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:

ROA	=	$15,400 / ($94,000 + 69,000)
ROA	=	0.0945, or 9.45%

This means the internal growth rate is:

Internal growth rate = (ROA × b) / [1 – (ROA × b)]

Internal growth rate = [0.0945(0.3701)] / [1 – 0.0945(0.3701)]

Internal growth rate = 0.0362, or 3.62%