Jamestowne Boats has a profit margin of 6.2 percent, a payout ratio of 30 percent, an ROA of 14.2 percent, and an ROE of 18.6 percent. This firm maintains a constant payout ratio and is currently operating at full capacity. What is the maximum rate at which the firm can grow without acquiring any additional external financing?

Question

Quizplus · Accepted Answer

The sustainable growth rate formula is:

sustainable growth rate = (ROA x (1 - payout ratio))

Therefore, the maximum rate at which the firm can grow without acquiring any additional external financing is:

sustainable growth rate = (0.142 x (1 - 0.30)) = 0.0994 or 9.94%

Note that the ROE is not used in this calculation, as the payout ratio is assumed to be constant.

Therefore, the best choice is B, which is closest to the calculated sustainable growth rate of 9.94%.

Jamestowne Boats Has a Profit Margin of 6