Use the following two statements to answer this question:
I.A firm's sustainable growth rate decreases with higher profit margins, higher asset turnover, and higher debt.
II.A firm's sustainable growth rate can be estimated by multiplying the earnings retention ratio by the return on equity.

Question

Quizplus · Accepted Answer

Statement I is incorrect because a firm's sustainable growth rate actually increases with higher profit margins, higher asset turnover, and higher leverage (not decreases). Statement II is correct as the sustainable growth rate can indeed be estimated by multiplying the earnings retention ratio (the proportion of earnings not paid out as dividends) by the return on equity (ROE).

Use the Following Two Statements to Answer This Question