Question

The Dog House has net income of $3,450 and total equity of $8,600. The payout ratio...

The Dog House has net income of $3,450 and total equity of $8,600. The payout ratio is 60%. What is the sustainable growth rate?

Group of answer choices

21.29%

19.11%

39.94%

14.47%

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Homework Answers

Answer #1

The sustainable growth rate is computed as shown below:

= [ (ROE x b) / (1 - (ROE x b) ) ]

ROE is computed as follows:

= Net income / Total equity

= $ 3,450 / $ 8,600

= 0.401162791

b is computed as follows:

= 1 - payout ratio

= 1 - 0.60

= 0.40

So, the sustainable growth rate is computed as follows:

= [ (0.401162791 x 0.40) / (1 - (0.401162791 x 0.40) ]

= 0.160465116 / 0.839534884

= 19.11% Approximately

Feel free to ask in case of any query relating to this question      

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