Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $100,000; common equity at the beginning of the year = $500,000; and the retention rate = 50%.
A) 10%
B) 15%
C) 20%
D) 25%
E) 30%

Question

Quizplus · Accepted Answer

The sustainable growth rate (SGR) is calculated as the return on equity (ROE) multiplied by the retention rate. ROE is net income divided by common equity at the beginning of the year, which is $100,000 / $500,000 = 0.20 or 20%. The retention rate is 50%, so SGR = 20% * 50% = 10%.

Determine a Venture's Sustainable Growth Rate Based on the Following