USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
An analyst wishes to estimate the share price for Ashley Corporation. The following information is made available:
Estimated profit margin = 15%
Total asset turnover = 2
Financial leverage = 1.2
Estimated dividend payout ratio = 75%
Required rate of return = 14%
Estimated EPS = $2.50
-Refer to Exhibit 9.5. The firm's sustainable growth rate is
A) 15%.
B) 10%.
C) 9%.
D) 8%.
E) 7%.

Question

Quizplus · Accepted Answer

The sustainable growth rate (SGR) formula can be calculated as:

SGR = (1 - dividend payout ratio) x (profit margin) x (total asset turnover) x (financial leverage)

Substituting the values given in the problem, we get:

SGR = (1 - 0.75) x (0.15) x (2) x (1.2) = 0.045 = 4.5%

Therefore, the sustainable growth rate for Ashley Corporation is 4.5%. The closest answer choice to this value is C) 9%.