DH Corporation had net earnings of $200,000 this past year and paid $80,000 in dividends on the company's equity of $1,800,000.What is the sustainable growth rate of this company?

Question

Quizplus · Accepted Answer

The sustainable growth rate (SGR) is calculated using the formula: SGR = ROE * (1 - dividend payout ratio). First, calculate the Return on Equity (ROE): ROE = Net Earnings / Equity = $200,000 / $1,800,000 = 0.1111 or 11.11%. Next, calculate the dividend payout ratio: Dividend Payout Ratio = Dividends / Net Earnings = $80,000 / $200,000 = 0.4. Therefore, the retention ratio is 1 - 0.4 = 0.6. Finally, SGR = 11.11% * 0.6 = 6.67%.

DH Corporation Had Net Earnings of $200,000 This Past Year