Chapter 4

Problems 1-32

Input boxes in tan

Output boxes in yellow
Given data in blue
Calculations in red
Answers in green

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To install these, click on the File tab
then "Options," "Add-Ins" and select
"Go." Check "Analyis ToolPak" and
"Solver Add-In," then click "OK."
equire that
Chapter 4
Question 1,2

Input area:

Income statement Balance sheet

Sales $ 38,000 Assets $ 27,300 Debt $ 6,700
Costs 32,600 Equity 20,600
Net income $ 5,400 Total $ 27,300 Total $ 27,300

Sales increase 15%

Payout rate 50%

Output area:

Pro forma income statement Pro forma balance sheet

Sales $ 43,700 Assets $ 31,395 Debt $ 7,705
Costs 37,490 Equity 23,690
Net income $ 6,210 Total $ 31,395 Total $ 31,395

Equity increase $ 3,090

Dividends $ 3,120

Pro forma income statement Pro forma balance sheet

Sales $ 43,700 Assets $ 31,395 Debt $ 6,700
Costs 37,490 Equity 23,705
Net income $ 6,210 Total $ 31,395 Total $ 30,405

Dividends $ 3,105 External financing needed $ 990

Add. To RE 3,105
Chapter 4
Question 3

Input area:

Income statement Balance sheet

Sales $ 7,200 Assets $ 21,700
Costs 4,730
Net income $ 2,470 Total $ 21,700

Next year's sales $ 8,424

Output area:

Percent increase in sales 17.00%

Pro forma income statement Pro forma balance sheet

Sales $ 8,424.00 Assets $ 25,389.00
Costs 5,534.10
Net income $ 2,889.90 Total $ 25,389.00

External financing $ 799.10

 Balance sheet
Debt $ 9,100
Equity 12,600
Total $ 21,700

ance sheet
Debt $ 9,100.00
Equity 15,489.90
Total $ 24,589.90
Chapter 4
Question 4

Input area:

Sales $ 25,400 Assets $ 61,000 Debt

Costs 17,300 Equity
Taxable income $ 8,100 Total $ 61,000 Total
Taxes (21%) 1,701
Net income $ 6,399

Dividend paid $ 2,100

Next year's sales $ 29,210

Tax rate 21%

Output area:

Percent increase in sales 15%

Pro forma income statement Pro forma balance sheet

Sales $ 29,210.00 Assets $ 70,150.00 Debt
Costs 19,895.00 Equity
Taxable income $ 9,315.00 Total $ 70,150.00 Total
Taxes (21%) 1,956.15
Net income $ 7,358.85
Dividends $ 2,415.00
Add. To RE $ 4,943.85

External financing $ 4,206.15

$ 26,900
34,100
$ 61,000

$ 26,900.00
39,043.85
$ 65,943.85
Chapter 4
Question 5

Input area:

Sales $ 7,900 Current assets $ 3,900 Current liabilities $ 2,100

Costs 5,500 Fixed assets 8,600 Long-term debt 3,700
Taxable income $ 2,400 Equity 6,700
Taxes 600 Total assets $ 12,500 Total $ 12,500
Net income $ 1,800

Payout ratio 40%

Sales increase 15%

Tax rate 25%

Output area:

Pro forma income statement Pro forma balance sheet

Sales $ 9,085.00 Current assets $ 4,485.00 Current liabilities $ 2,415.00
Costs 6,325.00 Fixed assets 9,890.00 Long-term debt 3,700.00
Taxable income $ 2,760.00 Equity 7,942.00
Taxes (25%) 690.00 Total $ 14,375.00 Total $ 14,057.00
Net income $ 2,070.00
Dividends $ 828.00
Add. To RE $ 1,242.00

External financing $ 318.00

Chapter 4
Question 6,7

Input area:

Sales $ 18,900 Current assets

Costs 12,800 Fixed assets
Taxable income $ 6,100 Total
Taxes 1,281
Net income $ 4,819

Payout ratio 30%

Tax rate 21%

Output area:

Return on assets 12.62%

Retention ratio 70%
Internal growth rate 9.69%

Return on equity 21.42%

Sustainable growth rate 17.64%
$ 11,700 Debt $ 15,700
26,500 Equity 22,500
$ 38,200 Total $ 38,200
Chapter 4
Question 8

Input area:

Sales $ 42,800 Current assets $ 17,500

Costs 35,500 Fixed assets 68,300
Taxable income $ 7,300 Total $ 85,800
Taxes 1,679
Net income $ 5,621

Payout ratio 40%

Tax rate 23%

Output area:

Return on equity 11.52%

Retention ratio 60%
Sustainable growth rate 7.42%

Maximum increase in sales $ 3,177.54

Debt $ 37,000
Equity 48,800
Total $ 85,800
Chapter 4
Question 9

Input area:

Sales $ 49,000
Costs 40,300
Taxable income $ 8,700
Taxes 1,914
Net income $ 6,786

Dividends $ 2,400
Addition to RE $ 4,386

Tax rate 22%

Increase in sales 20%

Output area:

Pro forma income statement

Sales $ 58,800
Costs 48,360
Taxable income $ 10,440
Taxes 2,297
Net income $ 8,143

Dividends $ 2,880
Add. To RE $ 5,263

Payout ratio 35.37%

Chapter 4
Question 10

Input area:

Sales $ 49,000

Current assets Current liabilities

Cash $ 2,950 Accounts payable $ 2,400
Accounts Receivable 4,100 Notes payable 5,400
Inventory 6,400 Total $ 7,800
Total $ 13,450 Long-term debt $ 28,000
Fixed assets
Net plant and equipment $ 41,300 Owners' equity
Common stock $ 15,000
Retained earnings 3,950
Total $ 18,950
Total liabilities and
Total assets $ 54,750 Owners' equity $ 54,750

Output area:

HEIR JORDAN CORPORATION

Balance Sheet
Assets Liabilities and Owners' equity
Current assets Current liabilities
Cash $ 2,950 6.02% Accounts payable $ 2,400 4.90%
Accounts Receivable 4,100 8.37% Notes payable 5,400 n/a
Inventory 6,400 13.06% Total $ 7,800 n/a
Total $ 13,450 27.45% Long-term debt $ 28,000 n/a
Fixed assets
Net plant and equipment $ 41,300 84.29% Owners' equity
Common stock $ 15,000 n/a
Retained earnings 3,950 n/a
Total $ 18,950 n/a
Total liabilities and
Total assets $ 54,750 111.73% Owners' equity $ 54,750
Chapter 4
Question 11

Input area:

Sales $ 49,000
Costs 40,300
Cash 2,950
Accounts receivable 4,100
Inventory 6,400
Net plant and equipment 41,300
Accounts payable 2,400
Notes payable 5,400
Long-term debt 28,000
Common stock 15,000
Retained earnings 3,950
Dividends 2,880
Net income 8,143

Increase in sales 15%

Tax rate 22%

Output area:
Payout ratio 35.37%

Pro forma income statement

Sales $ 56,350.00
Costs 46,345.00
Taxable income $ 10,005.00
Taxes 2,201.10
Net income $ 7,803.90

Dividends $ 2,760.00
Add. To RE $ 5,043.90

HEIR JORDAN CORPORATION

Balance Sheet
Assets Liabilities and Owners' equity
Current assets Current liabilities
Cash $ 3,392.50 Accounts payable $ 2,760.00
Accounts Receivable 4,715.00 Notes payable 5,400.00
Inventory 7,360.00 Total $ 8,160.00
Total $ 15,467.50 Long-term debt $ 28,000.00
Fixed assets
Net plant and equipment $ 47,495.00 Owners' equity
Common stock $ 15,000.00
Retained earnings 8,993.90
Total $ 23,993.90
Total liabilities and
Total assets $ 62,962.50 Owners' equity $ 60,153.90

External financing needed $ 2,808.60

Chapter 4
Question 12

Input area:

Return on assets 7.6%

Payout ratio 25%

Output area:

Plowback ratio 75%

Internal growth rate 6.04%

Chapter 4
Question 13

Input area:

Return on equity 14.7%

Payout ratio 30%

Output area:

Plowback ratio 70%

Sustainable growth rate 11.47%

Chapter 4
Question 14

Input area:

Profit margin 7.3%

Capital intensity ratio 0.80
Debt-equity ratio 0.95
Net income $ 73,000
Dividends $ 24,000

Output area:

Return on equity 17.79%

Plowback ratio 67.12%

Sustainable growth rate 13.56%

Chapter 4
Question 15

Input area:

Total asset turnover 2.90

Profit margin 5.2%
Equity multiplier 1.10
Payout ratio 35%

Output area:

Return on equity 16.59%

Plowback ratio 65.00%

Sustainable growth rate 12.09%

 Chapter 4
Question 16,17

Input area:

16) Percent of capacity 91%

Current sales $ 715,000
17) Fixed assets $ 520,000
Projected sales $ 790,000

Output area:

16) Full capacity $ 785,714

Maximum sales growth 9.89%

17) Fixed assets/Current sales 0.6618

Total fixed assets $ 522,836.36

New fixed assets $ 2,836.36

Chapter 4
Question 18

Input area:

Sustainable growth rate 12%

Debt/equity ratio 0.90
Payout ratio 25%
Assets/sales 0.85

Output area:

Plowback ratio 75%

Return on equity 14.29%

Profit margin 6.39%

Chapter 4
Question 19

Input area:

Internal growth rate 7.1%

Payout ratio 25%
Profit margin 6.5%

Output area:

Plowback ratio 75%

Return on assets 8.84%

Total asset turnover 1.36

Chapter 4
Question 20

Input area:

Profit margin 6.3%

Total asset turnover 1.75
Total debt ratio 0.35
Payout ratio 30%

Output area:

Debt/equity 0.54

Plowback ratio 0.7

Return on equity 16.96%

Sustainable growth rate 13.47%

Chapter 4
Question 21

Input area:

Sales $ 215,000
Net income $ 17,300
Dividends $ 9,400
Debt $ 77,000
Equity $ 59,000

Output area:

Plowback ratio 0.4566

Return on equity 29.32%
Sustainable growth rate 15.46%

New total assets $ 157,025.44

Debt/equity 1.31
New total debt $ 88,904.11
Additional borrowing $ 11,904.11

Return on assets 0.1272

Internal growth rate 6.17%
Chapter 4
Question 22

Input area:

Beginning equity $ 145,000

Ending TA $ 210,000
Net income $ 27,000
Dividends $ 5,800

Output area:

Addition to RE $ 21,200
Ending equity $ 166,200
Plowback ratio 78.52%

ROE (ending equity) 16.25%

ROE (beg. equity) 18.62%

Exact SGR 14.62%

ROE x b (using beg. 14.62%

Equity for ROE)

ROE x b (using end 12.76%

Equity for ROE)
Chapter 4
Question 23

Input area:

Beginning equity $ 145,000

Ending TA $ 210,000
Net income $ 27,000
Dividends $ 5,800

Output area:

Plowback ratio 78.52%

ROA (ending TA) 12.86%

Internal growth rate 11.23%

Beginning TA $ 188,800
Beginning ROA 14.30%

ROA (beginning TA) 11.23%

ROA x b (end ROA) 10.10%

Chapter 4
Question 24

Input area:

Sales $ 980,760 Assets Liabilities and owners' equity

Costs 792,960 Current assets Current liabilities
Other expenses 20,060 Cash $ 27,920 Accounts payable
EBIT $ 167,740 Accounts receivable 42,630 Notes payable
Interest expense 14,740 Inventory 95,910 Total
Taxable income $ 153,000 Total $ 166,460 Long-term debt
Taxes 32,130 Fixed assets
Net income $ 120,870 Net plant and Owners' equity
equipment $ 455,980 Common stock and
Dividends $ 39,250 paid-in surplus
Add. to retained earnings 81,620 Retained earnings
Total
Total liabilities and
Sales increase 20.00% Total assets $ 622,440 owners' equity
Tax rate 21%

Output area:

Dividend payout ratio 0.32

Pro Forma Income Statement Assets Liabilities and owners' equity

Sales $ 1,176,912 Current assets Current liabilities
Costs 951,552 Cash $ 33,504 Accounts payable
Other expenses 24,072 Accounts receivable 51,156 Notes payable
EBIT $ 201,288 Inventory 115,092 Total
Interest expense 14,740 Total $ 199,752 Long-term debt
Taxable income $ 186,548 Fixed assets
Taxes 39,175 Net plant and Owners' equity
Net income $ 147,373 equipment 547,176 Common stock and
Dividends $ 47,856 paid-in surplus
Add. To RE 99,517 Retained earnings
Total
Total liabilities and
Total assets $ 746,928 owners' equity

External financing $ 10,627

lities and owners' equity

$ 71,720
17,620
$ 89,340
$ 170,000

$ 140,000
223,100
$ 363,100

$ 622,440

lities and owners' equity

$ 86,064
17,620
$ 103,684
170,000

$ 140,000
322,617
$ 462,617

$ 736,301
Chapter 4
Question 25

Input area:

Sales $ 980,760 Assets Liabilities and owners' equity

Costs 792,960 Current assets Current liabilities
Other expenses 20,060 Cash $ 27,920 Accounts payable
EBIT $ 167,740 Accounts receivable 42,630 Notes payable
Interest expense 14,740 Inventory 95,910 Total
Taxable income $ 153,000 Total $ 166,460 Long-term debt
Taxes 32,130 Fixed assets
Net income $ 120,870 Net plant and Owners' equity
equipment $ 455,980 Common stock and
Dividends $ 39,250 paid-in surplus
Add. to retained earnings 81,620 Retained earnings
Total
Sales increase 20.00% Total liabilities and
Tax rate 21% Total assets $ 622,440 owners' equity
Operating capacity 80%

Output area:

Full capacity sales $ 1,225,950

Fixed assets/sales at full capacity 0.37194
Total fixed assets $ 437,741

Dividend payout ratio 0.32

Pro Forma Income Statement Assets Liabilities and owners' equity

Sales $ 1,176,912 Current assets Current liabilities
Costs 951,552 Cash $ 33,504 Accounts payable
Other expenses 24,072 Accounts receivable 51,156 Notes payable
EBIT $ 201,288 Inventory 115,092 Total
Interest expense 14,740 Total $ 199,752 Long-term debt
Taxable income $ 186,548 Fixed assets
Taxes 39,175 Net plant and Owners' equity
Net income $ 147,373 equipment 437,741 Common stock and
Dividends $ 47,856 paid-in surplus
Add. To RE 99,517 Retained earnings
Total
Total liabilities and
Total assets $ 637,493 owners' equity

External financing $ (98,808)

Assuming no fixed assets are sold:

2018 Pro Forma Income Statement Assets Liabilities and owners' equity
Sales $ 1,176,912 Current assets Current liabilities
Costs 951,552 Cash $ 33,504 Accounts payable
Other expenses 24,072 Accounts receivable 51,156 Notes payable
EBIT $ 201,288 Inventory 115,092 Total
Interest expense 14,740 Total $ 199,752 Long-term debt
Taxable income $ 186,548 Fixed assets
Taxes 39,175 Net plant and Owners' equity
Net income $ 147,373 equipment 455,980 Common stock and
Dividends $ 47,856 paid-in surplus
Add. To RE 99,517 Retained earnings
Total
Total liabilities and
Total assets $ 655,732 owners' equity

External financing $ (80,569)

lities and owners' equity

$ 71,720
17,620
$ 89,340
$ 170,000

$ 140,000
223,100
$ 363,100

$ 622,440

lities and owners' equity

$ 86,064
17,620
$ 103,684
170,000

$ 140,000
322,617
$ 462,617

$ 736,301

lities and owners' equity

$ 86,064
17,620
$ 103,684
$ 170,000

$ 140,000
322,617
$ 462,617

$ 736,301
Chapter 4
Question 26

Input area:

Sales $ 980,760 Assets Liabilities and owners' equity

Costs 792,960 Current assets Current liabilities
Other expenses 20,060 Cash $ 27,920 Accounts payable
EBIT $ 167,740 Accounts receivable 42,630 Notes payable
Interest expense 14,740 Inventory 95,910 Total
Taxable income $ 153,000 Total $ 166,460 Long-term debt
Taxes 32,130 Fixed assets
Net income $ 120,870 Net plant and Owners' equity
equipment $ 455,980 Common stock and
Dividends $ 39,250 paid-in surplus
Add. to retained earnings 81,620 Retained earnings
Total
Sales increase 20.00% Total liabilities and
Tax rate 21% Total assets $ 622,440 owners' equity

Output area:

2017 Debt-equity ratio 0.7142

Debt-asset ratio 0.4167
Equity-asset ratio 0.5833
New total debt $ 330,419
Increase in AP $ 14,344
New LTD $ 56,735
Excess debt raised $ 46,107

Dividend payout ratio 0.32

Pro Forma Income Statement Assets Liabilities and owners' equity

Sales $ 1,176,912 Current assets Current liabilities
Costs 951,552 Cash $ 33,504 Accounts payable
Other expenses 24,072 Accounts receivable 51,156 Notes payable
EBIT $ 201,288 Inventory 115,092 Total
Interest expense 14,740 Total $ 199,752 Long-term debt
Taxable income $ 186,548 Fixed assets
Taxes 39,175 Net plant and Owners' equity
Net income $ 147,373 equipment $ 547,176 Common stock and
Dividends $ 47,856 paid-in surplus
Add. To RE 99,517 Retained earnings
Total
Total liabilities and
EFN $ 56,735 Total assets $ 746,928 owners' equity

Assets Liabilities and owners' equity

Current assets Current liabilities
Cash $ 33,504 Accounts payable
Excess cash 46,107 Notes payable
Accounts receivable 51,156 Total
Inventory 115,092 Long-term debt
Total $ 245,859
Fixed assets Owners' equity
Net plant and Common stock and
equipment 547,176 paid-in surplus
Retained earnings
Total
Total liabilities and
Total assets $ 793,035 owners' equity

Assets Liabilities and owners' equity

Current assets Current liabilities
 Cash $ 33,504 Accounts payable
Accounts receivable 51,156 Notes payable
Inventory 115,092 Total
Total $ 199,752 Long-term debt
Fixed assets
Net plant and Owners' equity
equipment 547,176 Common stock and
Total debt at current D/A $ 311,208.00 paid-in surplus
Total equity at current D/A $ 435,720.00 Retained earnings
Total
Debt repurchase $ 19,211 Total liabilities and
Equity repurchase $ 26,897 Total assets $ 746,928 owners' equity
lities and owners' equity

$ 71,720
17,620
$ 89,340
$ 170,000

$ 140,000
223,100
$ 363,100

$ 622,440

lities and owners' equity

$ 86,064
17,620
$ 103,684
$ 226,735

$ 140,000
322,617
$ 462,617

$ 793,035

lities and owners' equity

$ 86,064
17,620
$ 103,684
226,735

$ 140,000
322,617
$ 462,617

$ 793,035

lities and owners' equity

$ 86,064
17,620
$ 103,684
207,524

$ 140,000
295,720
$ 435,720

$ 746,928
Chapter 4
Question 27

Input area:

Sales $ 980,760 Assets Liabilities and owners' equity

Costs 792,960 Current assets Current liabilities
Other expenses 20,060 Cash $ 27,920 Accounts payable
EBIT $ 167,740 Accounts receivable 42,630 Notes payable
Interest expense 14,740 Inventory 95,910 Total
Taxable income $ 153,000 Total $ 166,460 Long-term debt
Taxes 32,130 Fixed assets
Net income $ 120,870 Net plant and Owners' equity
equipment $ 455,980 Common stock and
Dividends $ 39,250 paid-in surplus
Add. to retained earnings 81,620 Retained earnings
Total
Total liabilities and
Sales increase 10.00% Total assets $ 622,440 owners' equity
Tax rate 21%

Output area:

Dividend payout ratio 0.32

Pro Forma Income Statement Assets Liabilities and owners' equity

Sales $ 1,078,836 Current assets Current liabilities
Costs 872,256 Cash $ 30,712 Accounts payable
Other expenses 22,066 Accounts receivable 46,893 Notes payable
EBIT $ 184,514 Inventory 105,501 Total
Interest expense 14,740 Total $ 183,106 Long-term debt
Taxable income $ 169,774 Fixed assets
Taxes 35,653 Net plant and Owners' equity
Net income $ 134,121 equipment 501,578 Common stock and
Dividends $ 43,553 paid-in surplus
Add. To RE 90,568 Retained earnings
Total
Total liabilities and
Total assets $ 684,684 owners' equity

External financing $ (35,496)

lities and owners' equity

$ 71,720
17,620
$ 89,340
$ 170,000

$ 140,000
223,100
$ 363,100

$ 622,440

lities and owners' equity

$ 78,892
17,620
$ 96,512
170,000

$ 140,000
313,668
$ 453,668

$ 720,180
Chapter 4
Question 28

Input area:

Sales $ 980,760 Assets Liabilities and owners' equity

Costs 792,960 Current assets Current liabilities
Other expenses 20,060 Cash $ 27,920 Accounts payable
EBIT $ 167,740 Accounts receivable 42,630 Notes payable
Interest expense 14,740 Inventory 95,910 Total
Taxable income $ 153,000 Total $ 166,460 Long-term debt
Taxes 32,130 Fixed assets
Net income $ 120,870 Net plant and Owners' equity
equipment $ 455,980 Common stock and
Dividends $ 39,250 paid-in surplus
Add. to retained earnings 81,620 Retained earnings
Total
Sales increase 35.00% Total liabilities and
Tax rate 21% Total assets $ 622,440 owners' equity

Output area:

Debt/equity ratio 0.7142

Debt-asset ratio 0.4167
Equity-asset ratio 0.5833
New total debt $ 340,005
Increase in AP $ 25,102
New LTD $ 55,563
Excess debt raised $ (24,249)

Dividend payout ratio 0.32

Pro Forma Income Statement Assets Liabilities and owners' equity

Sales $ 1,324,026 Current assets Current liabilities
Costs 1,070,496 Cash $ 37,692 Accounts payable
Other expenses 27,081 Accounts receivable 57,551 Notes payable
EBIT $ 226,449 Inventory 129,479 Total
Interest expense 14,740 Total $ 224,721 Long-term debt
Taxable income $ 211,709 Fixed assets
Taxes 44,459 Net plant and Owners' equity
Net income $ 167,250 equipment $ 615,573 Common stock and
Dividends $ 54,311 paid-in surplus
Add. To RE 112,939 Retained earnings
Total
Total liabilities and
EFN $ 79,813 Total assets $ 840,294 owners' equity
lities and owners' equity

$ 71,720
17,620
$ 89,340
$ 170,000

$ 140,000
223,100
$ 363,100

$ 622,440

lities and owners' equity

$ 96,822
17,620
$ 114,442
$ 225,563

$ 140,000
336,039
$ 476,039

$ 816,045
Chapter 4
Question 29

Input area:

Growth rate 12%

Debt-equity ratio 0.43
Profit margin 5.90%
Total assets to sales 1.80

Output area:

Return on equity 4.69%

Plowback ratio 2.29

Payout ratio (1.29)

This is a dividend payout ratio of -129% which is impossible;

the growth rate is not consistent with the other constraints. The lowest possible
payout ratio is 0, which corresponds to b = 1, or total earnings retention.

Maximum sustainable g 4.92%

h is impossible;
st possible
Chapter 4
Question 30,31

Output area:

External financing needed = Increase in assets - Addition to retained earnings

Increase in assets = A X g
Addition to retained earnings = (Net income X b) (1 + g)
Net income = PM(S)

Thus, EFN = A(g) - PM(S)b(1 + g)

= A(g) - PM(S)b - [PM(S)b]g
= -PM(S)b + [A-PM(S)b]g

Internal growth rate:

EFN = 0 = -PM(S)b + [A - PM(S)b]g

g = [PM(S)b] / [A - PM(S)b]
Since ROA = NI / A = PM(S) / A, dividing numerator and denominator by A gives
g = [(PM(S)b) / A] / [(A - PM(S)b) / A]
= b(ROA) / [1 - b(ROA)]
retained earnings

nominator by A gives
Chapter 4
Question 32

Output area:

In the following derivations, the subscript “E” refers to end of period numbers, and
the subscript “B” refers to beginning of period numbers. TE is total equity and
TA is total assets.

For the sustainable growth rate:

Sustainable growth rate = (ROE E × b)/(1 – ROEE × b)

Sustainable growth rate = (NI/TE E × b)/(1 – NI/TEE × b)

We multiply this equation by:

(TEE/TEE)

Sustainable growth rate = (NI/TE E × b)/(1 – NI/TEE × b) × (TEE/TEE)

Sustainable growth rate = (NI × b)/(TEE – NI × b)

Recognize that the numerator is equal to beginning of period equity, that is:

(TEE – NI × b) = TEB

Substituting this into the previous equation, we get:

Sustainable rate = (NI × b)/TEB

Which is equivalent to:

Sustainable rate = (NI/TEB) × b

Since ROEB = NI/TEB

The sustainable growth rate equation is:

Sustainable growth rate = ROE B × b

For the internal growth rate:

Internal growth rate = (ROAE × b)/(1 – ROAE × b)

Internal growth rate = (NI/TAE × b)/(1 – NI/TAE × b)

We multiply this equation by:

(TAE/TAE)

Internal growth rate = (NI/TAE × b)/(1 – NI/TAE × b) × (TAE/TAE)

Internal growth rate = (NI × b)/(TAE – NI × b)

Recognize that the numerator is equal to beginning of period assets, that is:

(TAE – NI × b) = TAB

Substituting this into the previous equation, we get:

Internal growth rate = (NI × b)/TAB

Which is equivalent to:

Internal growth rate = (NI/TAB) × b

Since ROAB = NI/TAB

The internal growth rate equation is:

Internal growth rate = ROAB × b

f period numbers, and
s total equity and

d equity, that is:

d assets, that is: