Sustainable Growth Rate You have located the following information on Rock Company: debt ratio = 40%, capital intensity ratio = 2.25 times, profit margin = 8%, and dividend payout ratio = 25%. What is the sustainable growth rate for Rock?
A) 3.56%
B) 6.00%
C) 4.65%
D) 8.00%

Question

Quizplus · Accepted Answer

The formula for sustainable growth rate is:

Sustainable Growth Rate = (Profit Margin x Retention Ratio) / (1 - (Profit Margin x Retention Ratio) x Capital Intensity Ratio)

Where Retention Ratio = 1 - Dividend Payout Ratio

Plugging in the given values, we get:

Retention Ratio = 1 - 0.25 = 0.75
Sustainable Growth Rate = (0.08 x 0.75) / (1 - (0.08 x 0.75) x 2.25) = 0.0465 or 4.65%

Therefore, the best choice is C.

Sustainable Growth Rate You Have Located the Following Information on Rock