A company has a net income of $238,000, total assets of $1,784,000 and total liabilities of $437,000. The company paid $66,640 in dividends. What is the sustainable growth rate of this firm?

Question

Quizplus · Accepted Answer

The sustainable growth rate (SGR) is calculated using the formula SGR = ROE * (1 - dividend payout ratio), where ROE (Return on Equity) is net income divided by shareholder's equity. Shareholder's equity can be found by subtracting total liabilities from total assets. In this case, shareholder's equity = $1,784,000 - $437,000 = $1,347,000. Thus, ROE = $238,000 / $1,347,000. The dividend payout ratio is dividends divided by net income, so $66,640 / $238,000. Plugging these values into the SGR formula gives us the sustainable growth rate, which is approximately 12.73%.

A Company Has a Net Income of $238,000, Total Assets