You have located the following information on Tyler Company: debt ratio = 50 percent, capital intensity ratio = 1.5 times, profit margin = 9 percent, and dividend payout ratio = 40 percent. What is the sustainable growth rate for Tyler?
A) 12.00 percent
B) 7.76 percent
C) 20.00 percent
D) 30.00 percent

Question

Quizplus · Accepted Answer

The sustainable growth rate can be calculated using the formula: Sustainable Growth Rate = ROE × (1 - Dividend Payout Ratio), where ROE (Return on Equity) can be calculated as Net Income / Equity. Given the debt ratio of 50 percent, the equity ratio is also 50 percent (since Debt Ratio + Equity Ratio = 100%). The capital intensity ratio is the inverse of the asset turnover ratio, so if capital intensity ratio is 1.5, then Asset Turnover = 1 / 1.5 = 0.6667. Profit Margin is given as 9 percent. First, calculate the Return on Assets (ROA) as Profit Margin × Asset Turnover = 0.09 × 0.6667 = 0.06 or 6%. Since the equity ratio is 50%, the ROE is 2 × ROA = 12%. Then, the sustainable growth rate = ROE × (1 - Dividend Payout Ratio) = 12% × (1 - 0.40) = 12% × 0.60 = 7.2%. However, there seems to be a discrepancy in the calculation based on the provided options. The correct approach was described, but the options given do not match the calculated result. The closest option based on the calculation method is B) 7.76 percent, acknowledging a potential error in the final calculation step or a misunderstanding in the provided options. The correct approach to calculate the sustainable growth rate involves using the given financial ratios and the formula for sustainable growth rate, but the exact match in the options might require reevaluation of the calculation or the options provided.

You Have Located the Following Information on Tyler Company: Debt