Wilkinson and Daughters has net income of $415,400, total assets of $2.2 million, and total liabilities of $1.08 million. The company paid $270,000 in dividends. What is the firm's sustainable rate of growth?
A)9.69%
B)11.06%
C)12.98%
D)13.93%
E)14.15%

Question

Quizplus · Accepted Answer

The sustainable growth rate (SGR) is calculated using the formula: SGR = ROE * (1 - dividend payout ratio). First, calculate the equity: Equity = Total Assets - Total Liabilities = $2.2 million - $1.08 million = $1.12 million. Next, calculate the Return on Equity (ROE): ROE = Net Income / Equity = $415,400 / $1.12 million = 0.3709 or 37.09%. The dividend payout ratio is: Dividend Payout Ratio = Dividends / Net Income = $270,000 / $415,400 = 0.65 or 65%. Therefore, the retention ratio is 1 - 0.65 = 0.35 or 35%. Finally, SGR = 37.09% * 35% = 12.98%.

Wilkinson and Daughters Has Net Income of $415,400, Total Assets