Omega Limited has net income of $28 million, earnings before tax of $40 million, earnings before interest and tax of $70 million, gross profit of $100 million, sales of $400 million, assets of $500 million, current liabilities of $50 million, shareholders’ equity of $120 million, dividends of $15 million, shares outstanding of 100 million and share price of $2 per share. Calculate sustainable growth rate ratio?

Question

BlackTom AI · Accepted Answer

To approach the sustainable growth rate, we recall the formula SGR = ROE × retention ratio, where the retention ratio is 1 minus the dividend payout ratio.
Option 1: 13.33% — If we test this, we’d need a ROE and retention combo that multiplies to 0.1333. Given the numbers, ROE = Net Income / Shareholders’ Equity = 28 / 120 ≈ 0.2333. The retention ratio, based on dividends of 15 and net income of 28, is Retention = 1 − (Dividends / Net Income) = 1 − (15 / 28) ≈ 1 − 0.5357 ≈ 0.4643. Multiplying 0.2333 by 0.4643 gives ≈ 0.1083, not 0.1333, so 13.33% is not supported by these figures.
Option 2: 12.50% — This would require SGR ≈ 0.125. With ROE ≈ 0.2333 and retention ≈ 0.4643, the product is about 0.1083. Since 0.1083 ≠ 0.125, this option does not fit the computed values.
Option 3: 13.33% (duplicate) — As explained for Option 1, 0.1333 would demand a different combination of ROE and retention than the given data. The actual product from the inputs is around 0.1083, so this option remains incorrect for the same reason.
Option 4: 10.83% — This matches the straightforward calculation: ROE ≈ 28 / 120 ≈ 0.2333 and Retention ≈ 1 − (15 / 28) ≈ 0.4643. Multiplying 0.2333 by 0.4643 yields ≈ 0.1083, i.e., 10.83%. The numbers align precisely with the standard SGR formula, confirming this as the correct interpretation given the inputs.

BFIL001 Week 8 Practice Quiz

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