What is the sustainable growth rate for a firm with $250,000 in net income, $20,000 in preferred stock dividends, $80,000 in common stock dividends, and an average equity balance of $1 million?

Question

Quizplus · Accepted Answer

The sustainable growth rate formula is plowback ratio x ROE. The plowback ratio is the portion of the earnings that are reinvested in the company, which can be calculated as 1 - (preferred stock dividends + common stock dividends) / net income. In this case, the plowback ratio is 1 - ($20,000 + $80,000) / $250,000 = 0.6 or 60%. The ROE is calculated as net income / average equity, which gives us $250,000 / $1 million = 25%. Therefore, the sustainable growth rate is 0.6 x 25% = 15%. Thus, option C is the correct answer.

What Is the Sustainable Growth Rate for a Firm with $250,000