Reference no: EM132420074
Stockholder's Equity and Sustainable Growth Rate
Adapted from Chapter 9 problem 2 (solve the version below, not the book's):
Petal Providers Corporation is interested in estimating its sustainable sales growth rate. For 2018, revenues were $1 million; net profits were $50,000; ending total assets were $750,000; ending payables and accruals were $100,000; and stockholders' equity at the end of the year was $450,000 consisting of $350,000 in common stock and $100,000 in retained earnings.
The venture did not pay out any dividends for 2018, and neither the founder nor outside investors invested money in the company in 2018.
The venture does not expect to pay dividends for the foreseeable future (i.e., the venture plans to retain all its earnings or in other words RR = 1)
a. What were the stockholder's equity, common stock, and retained earnings at the beginning of 2018?
Stockholders Equity in 2018: 400,000.00
Retained earning + common stock
50,000 + 350,000 = 400,000
Common stock in 2018 : 350,000.00
Common stock remains the same from beginning of year to end of year since no investment has been made.
Retained earnings: 50,000
No dividends paid during year, so can be calculated by deducting net profit from retained earnings at year end (100,000 = 50,000 = 50,000).
b. Calculate the sustainable sales growth rate g of the company. Use the beginning stockholder equity for 2018 to calculate ROE. (Note that ROE is usually calculated using average equity for the year, but for sustainable growth rate you should use beginning equity to calculate ROE.)
Net income/shareholders equity
50,000 / 400,000 = 0.125
= 0.125 * 1 * 100 = 12.5
= 12.5%
c. Suppose in 2019 the company had net profits of $75,000 and the founder invested $100,000. What would the common stock and retained earnings be at the end of 2019?