Use the following information to estimate a venture's sustainable growth rate: Net income = $200,000; Total assets = $1,000,000; equity multiple based on beginning common equity = 2.0 times; and Retention rate = 25%.
A) 50%
B) 25%
C) 20%
D) 10%
E) 5%

Question

Quizplus · Accepted Answer

The sustainable growth rate (SGR) is calculated as the product of the retention rate and the return on equity (ROE). ROE is net income divided by equity. Given an equity multiple of 2.0, equity is $500,000. Thus, ROE = $200,000 / $500,000 = 0.4 or 40%. SGR = 40% * 25% = 10%.

Use the Following Information to Estimate a Venture's Sustainable Growth