The Lo-Gro Co. in 2014 had equity of $15 million, net income of $1,800,000 of which 60% was paid out as dividends. The sustainable growth rate for the Lo-Gro Co. is:
A) 0.48%.
B) 4.80%.
C) 0.72%.
D) 7.20%.

Question

Quizplus · Accepted Answer

The sustainable growth rate can be calculated using the formula: Sustainable Growth Rate = ROE * (1 - dividend payout ratio). Here, ROE (Return on Equity) = Net Income / Equity = $1,800,000 / $15,000,000 = 0.12 or 12%, and the dividend payout ratio is 60%, so the retention ratio (b) is 1 - 0.60 = 0.40. Thus, Sustainable Growth Rate = 0.12 * 0.40 = 0.048 or 4.80%.