A firm has a debt ratio of 45%, capital intensity ratio is 1.3 times, profit margin is 10%, and dividend payout ratio is 30%. Calculate the sustainable growth rate for the firm.
A) 1.56%
B) 2.96%
C) 3.05%
D) 4.79%

Question

Quizplus · Accepted Answer

The sustainable growth rate formula 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 values, we get:

Retention ratio = (1 - 0.30) = 0.70

Sustainable Growth Rate = (0.10 x 0.70) / (1 - (0.10 x 0.70) x 1.3) = 0.0305 or 3.05%

Therefore, the best choice is C.

A Firm Has a Debt Ratio of 45%, Capital Intensity