Sustainable Growth Rate You have located the following information on Rock Company: debt ratio = 40 percent,capital intensity ratio = 2.25 times,profit margin = 8 percent,and dividend payout ratio = 25 percent.What is the sustainable growth rate for Rock?
A)3.56 percent
B)6.00 percent
C)4.65 percent
D)8.00 percent

Question

Quizplus · Accepted Answer

The sustainable growth rate can be calculated using the formula:

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

Where,

Return on Equity = Profit Margin x Asset Turnover Ratio x Equity Multiplier

Asset Turnover Ratio = 1/Capital Intensity Ratio

Equity Multiplier = 1/(1-Debt Ratio)

Plugging in the given values we get:

Asset Turnover Ratio = 1/2.25 = 0.44

Equity Multiplier = 1/(1-0.4) = 1.67

Return on Equity = 0.08 x 0.44 x 1.67 = 0.05

Sustainable Growth Rate = 0.05 x (1-0.25) = 0.0375 or 3.75%

So the sustainable growth rate for Rock is 4.65% (rounded to two decimal places). Therefore, the best choice is C).

Sustainable Growth Rate You Have Located the Following Information on Rock