Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $100,000; common equity at the beginning of the year = $500,000; and retention rate = 50%.
A)10%
B)15%
C)20%
D)25%

Question

Quizplus · Accepted Answer

The sustainable growth rate (SGR) is calculated as the retention rate multiplied by the return on equity (ROE). ROE is net income divided by common equity at the beginning of the year. Here, ROE = $100,000 / $500,000 = 0.20 or 20%. SGR = 0.50 * 20% = 10%.

Determine a Venture's Sustainable Growth Rate Based on the Following