Sterling Inc. currently has sales of $4,512,644 and net income of $736,253. It has a debt ratio of 47 percent and a dividend payout ratio of 65 percent. The company has total assets of $3,812,832. What is the company's sustainable growth rate? (In your interim computations, round your ROE percentage to one decimal place.)

Question

Quizplus · Accepted Answer

The sustainable growth rate (SGR) formula is SGR = ROE × (1 - dividend payout ratio), where ROE (Return on Equity) is net income divided by equity. First, calculate equity using the debt ratio: Equity = Total Assets × (1 - Debt Ratio) = $3,812,832 × (1 - 0.47) = $2,020,801. Then, calculate ROE = Net Income / Equity = $736,253 / $2,020,801 = 0.364 or 36.4% (rounded to one decimal place). Finally, calculate SGR = 0.364 × (1 - 0.65) = 0.1274 or 12.74%.