Question

9. Last year, a firm had a ROA of 14.5 percent and a dividend payout ratio of 35 percent. What is the firm’s
internal growth rate?
A. 33.33%
B. 25.40%
C. 19.05%
D. 13.64%
E. 10.41%

10. In 2014, Umbrellas Unlimited, Inc. had an ROE of 18.5 percent and a dividend payout ratio of 40 percent.
What is the sustainable growth rate?
A. 19.76%
B. 13.17%
C. 12.49%
D. 10.99%
E. 10.12%

14. In 2015, Burgundy Shoes, Inc. had net income of $313,125, sales of $1.95 million, and debt of $780,000.
Suppose the firm has total assets of $2.45 million and a dividend payout ratio of 42%. What is the sustainable
growth rate?

A. 19.8%
B. 17.5%
C. 15.1%
D. 13.9%
E. 12.2%

15. You have located the following information on Clay Pots Company: debt ratio = 36%, capital intensity ratio =
1.60 times, profit margin = 11.5%, and dividend payout ratio = 25%. What is the sustainable growth rate for
Clay Pots?
A. 9.89%
B. 9.20%
C. 8.15%
D. 6.83%
E. 7.56%

Answer 1

Answer to Question 9:

The correct answer is E i.e. 10.41%

Retention ratio, b = 1 – Dividend pay-out ratio
Retention ratio, b = 1 – 0.35
Retention ratio, b = 0.65

Internal Growth Rate = (ROA * b) / (1 – ROA *b)
Internal Growth rate = (0.145 * 0.65) / (1 – 0.145 * 0.65)
Internal Growth rate = 0.0943 / 1 – 0.0943
Internal Growth Rate = 0.0943 / 0.9057
Internal Growth rate = 0.1041 or 10.41%

Answer to Question 10:

The correct answer is C i.e. 12.49%

Retention Ratio, b = (1 – Dividend payout ratio)
Retention Ratio, b = 1 – 0.4
Retention Ratio, b = 0.6

Sustainable Growth Rate = (ROE * b) / (1 – ROE *b)
Sustainable Growth Rate = (0.185 * 0.6) / (1 – 0.185 * 0.6)
Sustainable Growth Rate = 0.111 / 1- 0.111
Sustainable Growth Rate = 0.111 / 0.889
Sustainable Growth Rate = 0.1249 or 12.49%

Answer to Question 14:

The correct answer is E i.e. 12.2%

Total Equity = Total Assets - Total Debt
Total Equity = $2,450,000 - $780,000
Total Equity = $1,670,000

ROE = Net Income / Total Equity
ROE = $313,125 / $1,670,000
ROE = 0.1875 or 18.75%

Retention Ratio, b = 1 – dividend payout ratio
Retention Ratio, b = 1 – 0.42
Retention Ratio, b = 0.58

Sustainable Growth Rate = (ROE * b) / (1 – ROE * b)
Sustainable Growth Rate = (0.1875 * 0.58) / (1 – 0.1875 * 0.58)
Sustainable Growth Rate = 0.10875 / (1 – 0.10875)
Sustainable Growth Rate = 0.10875 / 0.89125
Sustainable Growth Rate = 0.1220 or 12.20%

Answer to Question 15:

The correct answer is B i.e. 9.20%

ROE = Profit Margin * (1 / Capital Intensity Ratio) * (1 / (1 - Debt Ratio))
ROE = 11.50% * (1 / 1.60) * (1 / (1 - 0.36))
ROE = 11.50% * (1 / 1.60) * (1 / 0.64)
ROE = 11.23%

Retention Ratio, b = 1 – dividend payout ratio
Retention Ratio, b = 1 – 0.25
Retention Ratio, b = 0.75

Sustainable Growth Rate = (ROE * b) / (1 – ROE * b)
Sustainable Growth Rate = (0.1123 * 0.75) / (1 – 0.1123 * 0.75)
Sustainable Growth Rate = 0.0842 / (1 – 0.0842)
Sustainable Growth Rate = 0.0842 / 0.9158
Sustainable Growth Rate = 9.20%