Suppose a firm has a net profit margin of 15%, sales of $155 million, assets of $312 million, and owner’s equity of $223. If the dividend payout ratio is 10%, what is the firm’s sustainable growth rate?

Question

BlackTom AI · Accepted Answer

Begin by identifying the key financial relationships involved: sustainable growth rate (g) is commonly calculated as g = ROE × retention ratio, where retention ratio b equals 1 minus the dividend payout ratio.

Step 1: Compute net income from the given net profit margin and sales. Net income = net profit margin × sales = 0.15 × 155 million = 23.25 million.

Step 2: Determine return on equity (ROE). ROE = Net income / Shareholders' equity = 23.25 million / 223 million ≈ 0.1043, i.e., about 10.43%.

Step 3: Find the retention ratio. With a dividend payout ratio of 10%, the retention ratio b = 1 − 0.10 = 0.90.

Step 4: Calculate the sustainable growth rate g = ROE × b = 10.43% × 0.90 ≈ 9.387%, which rounds to about 9.38%.

Step 5: Confirm the units and rounding. Each intermediate figure is consistent in absolute terms (millions for incomes and equity, percentages for margins and ROE), and rounding to two decimals yields g ≈ 9.38%.

Summary check: The approach relies on standard stylized facts of sustainable growth in the dupla framework (retention drives growth via reinvested earnings, scaled by profitability as ROE). If any piece is altered (e.g., payout ratio or margins), the final g would shift accordingly.

MSB-250-300-002 Topic 4 Quiz

Suppose a firm has a net profit margin of 15%, sales of $155 million, assets of $312 million, and owner’s equity of $223. If the dividend payout ratio is 10%, what is the firm’s sustainable growth rate?

View Explanation

Log in for full answers

Similar Questions

Given the following information, what is the sustainable growth rate? Total Assets = $1500 Current Liabilities = $396 Long-Term Liabilities = $902 Total Equity = $202 Sales = $644 COGS = $208 Operating Expenses = $310 Net Income = $112 Retained Earnings = $70 Dividends = $42

Suppose a firm has a net profit margin of 20%, sales of $150 million, assets of $300 million, and owner’s equity of $225 million. If the dividend payout ratio is 10%, what is the firm’s sustainable growth rate?

In the context of financial planning models, the planned growth rate is g, the internal growth rate is gi, and the sustainable growth rate is g*. Select the correct alternative:

Last year, a firm reported total assets of $2,000,000, sales of $745,000, net income of $175,000. The firm paid $60,000 in dividends, holding its payout ratio constant. What annual rate of growth can the firm maintain without having to look for external financing?

A company with a return on equity of 15% and a payout ratio of 36% would expect a constant-growth rate of:

In a consumer society, many adults channel creativity into buying things

Economic stress and unpredictable times have resulted in a booming industry for self-help products

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler