The Lo-Gro Co. in 2010 had equity of $15 million, net income of $1,800,000 of which 60% was paid out as dividends. The sustainable growth rate for the Lo-Gro Co. is:
A) 0.48%.
B) 4.80%.
C) 0.72%.
D) 7.20%.

Question

Quizplus · Accepted Answer

The sustainable growth rate formula is:

Sustainable growth rate = (Net income / Equity) x (1 - Dividend payout ratio)

Where:
Net income = $1,800,000
Equity = $15,000,000
Dividend payout ratio = 60% = 0.60

Sustainable growth rate = ($1,800,000 / $15,000,000) x (1 - 0.60)
Sustainable growth rate = 0.12 x 0.40
Sustainable growth rate = 0.048 or 4.80%

Therefore, the correct answer is B) 4.80%.