Use the following information to estimate a venture's sustainable growth rate: net income = $200,000; total assets = $1,000,000; equity multiplier based on beginning common equity = 2.0 times; and retention rate = 25%.
A)5%
B)25%
C)20%
D)10%

Question

Quizplus · Accepted Answer

The sustainable growth rate can be calculated using the formula: Sustainable Growth Rate = ROE * Retention Rate. First, calculate the Return on Equity (ROE). ROE = Net Income / Equity. Given an equity multiplier of 2.0 times and total assets of $1,000,000, Equity = Total Assets / Equity Multiplier = $1,000,000 / 2 = $500,000. Thus, ROE = $200,000 / $500,000 = 0.4 or 40%. With a retention rate of 25%, the sustainable growth rate = 40% * 25% = 10%.

Use the Following Information to Estimate a Venture's Sustainable Growth