You have located the following information on Maize Company: debt ratio = 20 percent, capital intensity ratio = 1.25 times, profit margin = 12 percent, and dividend payout ratio = 10 percent. What is the sustainable growth rate for Maize?
A) 1.20 percent
B) 10.10 percent
C) 12.11 percent
D) 73.26 percent

Question

Quizplus · Accepted Answer

The sustainable growth rate (SGR) is calculated using the formula: SGR = ROE * (1 - dividend payout ratio). First, calculate ROE using the formula: ROE = Profit Margin * Asset Turnover * Equity Multiplier. Given the capital intensity ratio (Asset Turnover) is 1/1.25, and the equity multiplier is 1/(1 - debt ratio), we find ROE and then SGR.

You Have Located the Following Information on Maize Company: Debt