3. Scott Kelly is reviewing MasterToy’s financial statements in order to estimate its sustainable growth rate. Consider the information presented in the following exhibit.

MasterToy, Inc.: Actual 2003 and estimated 2004 financial statements for fiscal year ending December 31 ($ million, except per-share data)
2003 2004 e Change (%)
Income Statement Revenue $4,750 $5,140 7.6%
Cost of goods sold 2,400 2,540 Selling, general, and administrative 1,400 1,550 Depreciation 180 210 Goodwill amortization 10 10 Operating income $ 760 $ 830 8.4 Interest expense 20 25 Income before taxes $ 740 $ 805 Income taxes 265 295 Net income $ 475 $ 510 Earnings per share $ 1.79 $ 1.96 8.6 Averages shares outstanding (millions) 265 260 Balance Sheet Cash $ 400 $ 400 Accounts receivable 680 700 Inventories 570 600 Net property, plant, and equipment 800 870 Intangibles 500 530 Total assets $2,950 $3,100 Current liabilities 550 600 Long-term debt 300 300 Total liabilities $ 850 $ 900 Stockholders’ equity 2,100 2,200 Total liabilities and equity $2,950 $3,100 Book value per share $ 7.92 $ 8.46 Annual dividend per share $ 0.55 $ 0.60

a. Identify and calculate the components of the DuPont formula.

b. Calculate the ROE for 2004 using the components of the DuPont formula.

c. Calculate the sustainable growth rate for 2004 from the firm’s ROE and plowback ratios.