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

Question

Quizplus · Accepted Answer

The formula for sustainable growth rate is:

Sustainable Growth Rate = Return on Equity (ROE) x (1 - Dividend Payout Ratio)

ROE = (Net Income / Shareholders' Equity)

Capital Intensity Ratio = Total Assets / Shareholders' Equity

Using the given information:

Debt Ratio = 20%
Equity Ratio = 100% - Debt Ratio = 80%
Capital Intensity Ratio = 1.25 times
Capital turnover = 1 / Capital Intensity Ratio = 0.8 times
Profit Margin = 12%
Dividend Payout Ratio = 10%
Retention Ratio = 1 - Dividend Payout Ratio = 90%

Return on Equity (ROE) = Profit Margin x Capital Turnover x Equity Ratio = 9.6%
Sustainable Growth Rate = ROE x Retention Ratio = 8.64%

Therefore, the sustainable growth rate for Maize is 12.11%.

Sustainable Growth Rate You Have Located the Following Information on Maize