If a venture has a return on assets (ROA)of 10%, an equity multiplier based on beginning equity of 3.5 times, and a retention rate of 50%, the sustainable growth rate would be:
A)10.0%
B)17.5%
C)20.0%
D)35.0%

Question

Quizplus · Accepted Answer

The formula for calculating sustainable growth rate is:
Retained Earnings/Total Equity = Retention Rate x Return on Equity
Return on Equity = ROA x Equity Multiplier

Using the given values:
Return on Equity = 10% x 3.5 = 35%
Retention Rate = 50%

Retained Earnings/Total Equity = 0.5 x 35%
Retained Earnings/Total Equity = 17.5%

Therefore, the sustainable growth rate is 17.5%. Hence option B is correct.

If a Venture Has a Return on Assets (ROA)of 10