Calculate the rate at which a firm can grow without changing its leverage if its payout ratio is 70%,equity outstanding at the beginning of the year is $900,000,and its net income for the year is $150,000.

Question

Quizplus · Accepted Answer

The sustainable growth rate is calculated as (1 - Payout Ratio) * Return on Equity. The Return on Equity is calculated as Net Income / Equity. So, the sustainable growth rate is (1 - 0.7) * (150,000 / 900,000) = 0.1167 or 11.67%.

Calculate the Rate at Which a Firm Can Grow Without