The Watermelon Patch has a retention ratio of .75, dividends of $50,000, and total equity of $3.5 million. What is the firm's sustainable rate of growth?

Question

Quizplus · Accepted Answer

The sustainable growth rate can be calculated using the formula: Sustainable Growth Rate = Retention Ratio * Return on Equity (ROE). First, we find the ROE = Net Income / Total Equity. Given dividends and retention ratio, we can find Net Income = Dividends / (1 - Retention Ratio) = $50,000 / (1 - 0.75) = $200,000. Then, ROE = $200,000 / $3,500,000 = 5.71%. Finally, Sustainable Growth Rate = 0.75 * 5.71% = 4.29%.

The Watermelon Patch Has a Retention Ratio of