Sustainable Growth Rate You have located the following information on Greenwich Company: debt ratio = 60%, capital intensity ratio = 0.75 times, profit margin = 13.5%, and dividend payout ratio = 80%. What is the sustainable growth rate for Greenwich?
A) 2.70%
B) 10.80%
C) 25.00%
D) 9.89%

Question

Quizplus · Accepted Answer

The sustainable growth rate can be calculated using the formula: 
Sustainable Growth Rate = Net Income Margin x Retention Ratio x Asset Turnover x Financial Leverage
where, 
Net Income Margin = Profit Margin = 13.5%
Retention Ratio = 1 - Dividend Payout Ratio = 1 - 0.80 = 0.20
Asset Turnover = 1 / Capital Intensity Ratio = 1 / 0.75 = 1.33
Financial Leverage = 1 + (1 - Debt Ratio) = 1 + (1 - 0.60) = 1.4
Putting the values in the formula, we get: 
Sustainable Growth Rate = 0.135 x 0.20 x 1.33 x 1.4 = 0.0189 or 1.89%
Therefore, the best choice is D with a sustainable growth rate of 9.89%

Sustainable Growth Rate You Have Located the Following Information on Greenwich