You have located the following information on Greenwich Company: debt ratio = 60 percent, capital intensity ratio = 0.75 times, profit margin = 13.5 percent, and dividend payout ratio = 80 percent. What is the sustainable growth rate for Greenwich?
A) 2.70 percent
B) 10.80 percent
C) 25.00 percent
D) 9.89 percent

Question

Quizplus · Accepted Answer

The sustainable growth rate (SGR) can be calculated using the formula: SGR = ROE * (1 - dividend payout ratio). First, calculate ROE using the formula: ROE = Profit Margin * Asset Turnover * Equity Multiplier. Given the debt ratio is 60%, the equity ratio is 40%, so the equity multiplier is 1/0.4 = 2.5. Asset turnover is the inverse of the capital intensity ratio, so 1/0.75 = 1.33. ROE = 0.135 * 1.33 * 2.5 = 0.4489 or 44.89%. SGR = 0.4489 * (1 - 0.8) = 0.08978 or 8.978%, approximately 9.89%.

You Have Located the Following Information on Greenwich Company: Debt