Given the following information: proﬁt margin = 10%; sales = $100; retention ratio = 40%; assets = $200; equity multiplier = 2.0. If the ﬁrm maintains a constant debt-equity ratio and no new equity is
Used, what is the maximum growth rate? (Assume a constant proﬁt margin.)

Question

Quizplus · Accepted Answer

The maximum growth rate can be calculated using the sustainable growth rate formula: SGR = ROE * retention ratio. ROE (Return on Equity) is calculated as (Profit Margin * Asset Turnover * Equity Multiplier). Given the profit margin is 10%, sales are $100, assets are $200, and the equity multiplier is 2.0, the asset turnover is sales/assets = 100/200 = 0.5. Therefore, ROE = 0.10 * 0.5 * 2.0 = 0.10. The retention ratio is 40%, so SGR = 0.10 * 0.40 = 0.04 or 4.0%. The closest option is 4.17%.

Given the Following Information: Proﬁt Margin = 10%; Sales =