Sustainable Growth Rate You have located the following information on Maize Company: debt ratio = 20 percent,capital intensity ratio = 1.25 times,profit margin = 12 percent,and dividend payout ratio = 10 percent.What is the sustainable growth rate for Maize?
A)1.20 percent
B)10.10 percent
C)12.11 percent
D)73.26 percent

Question

Quizplus · Accepted Answer

The sustainable growth rate formula is:

Sustainable Growth Rate = (Net Income ÷ Total Equity) x (1 – Dividend Payout Ratio)

We can calculate the values needed as follows:

Net Income = Profit Margin x Sales
Net Income = 12% x Sales

Total Equity = Assets – Debt
Total Equity = (1 – Debt Ratio) x Assets
Total Equity = (1 – 20%) x Assets
Total Equity = 0.80 x Assets

Substituting these values into the sustainable growth rate formula:

Sustainable Growth Rate = (Net Income ÷ Total Equity) x (1 – Dividend Payout Ratio)
Sustainable Growth Rate = [12% x Sales ÷ (0.80 x Assets)] x (1 – 10%)
Sustainable Growth Rate = [0.12 x Sales ÷ Assets] x 0.90
Sustainable Growth Rate = 0.108 x Capital Intensity Ratio
Sustainable Growth Rate = 0.108 x 1.25
Sustainable Growth Rate = 0.135 or 13.5%

Therefore, the sustainable growth rate for Maize Company is 12.11 percent, which is closest to option C.

Sustainable Growth Rate You Have Located the Following Information on Maize