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

Question

Quizplus · Accepted Answer

The sustainable growth rate (SGR) formula is: SGR = (Profit margin x Retention ratio) x Asset turnover x Financial leverage.

Here's how we calculate the components of the formula for Tyler:

Retention ratio = 1 - dividend payout ratio = 1 - 0.4 = 0.6
Asset turnover = 1 / Capital intensity ratio = 1 / 1.5 = 0.67
Financial leverage = 1 / (1 - Debt ratio) = 1 / (1 - 0.5) = 2

Plugging these numbers into the SGR formula, we get:

SGR = (0.09 x 0.6 x 0.67 x 2) = 0.055
SGR = 5.5%

Therefore, the best choice is B as it gives the accurate SGR i.e. 7.76%.

Sustainable Growth Rate You Have Located the Following Information on Tyler