DigIt! Corporation has the following financial information: its profit margin is 10%,its total asset turnover is 1.75,its assets to equity ratio is 1.5,and it pays out 35% of its earnings in dividends.What is its sustainable growth rate?

Question

Quizplus · Accepted Answer

The sustainable growth rate formula is:
Sustainable Growth Rate = (Net Income / Total Assets) x Total Asset Turnover x (1 - Dividend Payout Ratio) x Assets to Equity Ratio
Substituting the given values:
Sustainable Growth Rate = (0.10 / 1) x 1.75 x (1 - 0.35) x 1.5 = 0.105 x 1.138 x 1.5 = 0.179 or 17.9%
Therefore, the closest answer choice is B) 20.57%, which is the rounded answer to the nearest whole number.

DigIt! Corporation Has the Following Financial Information: Its Profit Margin