Last year Foley Inc. reported total assets of $500, equity of $400, net income of $100, dividends of $50, and earnings retained in the period of $50. What is Foley Inc.'s sustainable growth rate?

Question

Quizplus · Accepted Answer

The sustainable growth rate formula is:

(Sustainable Growth Rate) = (Net Income / Equity) x (1 - Dividend Payout Ratio)

To solve the problem, we can use the information provided in the question:

Net Income = $100
Equity = $400
Dividends = $50
Earnings Retained = $50

First, we need to calculate the dividend payout ratio, which is:

Dividend Payout Ratio = (Dividends / Net Income)
Dividend Payout Ratio = ($50 / $100)
Dividend Payout Ratio = 0.5

Now, we can plug in the values into the sustainable growth rate formula:

Sustainable Growth Rate = (Net Income / Equity) x (1 - Dividend Payout Ratio)
Sustainable Growth Rate = ($100 / $400) x (1 - 0.5)
Sustainable Growth Rate = 0.25 x 0.5
Sustainable Growth Rate = 0.125 or 12.5%

Therefore, the answer is D) 12.5 percent.

Last Year Foley Inc