Question

Okafor Design has equity of $168,500, total assets of $195,000, net income of $63,000, and dividends of $37,800. What is the sustainable growth rate?

Group of answer choices
a) 21.60%
b) 12.76%
c) 14.33%
d) 1750%
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Answer 1

The sustainable growth rate is calculated using the formula: Sustainable Growth Rate = (Net Income / Equity) x (1 - Dividend Payout Ratio). Given the information, the sustainable growth rate for Okafor Design is 14.88%, which is closest to option c) 14.33%.

Step-by-step explanation:

The sustainable growth rate is calculated using the formula:

Sustainable Growth Rate = (Net Income / Equity) x (1 - Dividend Payout Ratio)

Given the information provided:

• Equity = $168,500
• Net Income = $63,000
• Dividends = $37,800

First, we need to calculate the dividend payout ratio:

Dividend Payout Ratio = Dividends / Net Income

Dividend Payout Ratio = $37,800 / $63,000 = 0.6

Next, we can calculate the sustainable growth rate:

Sustainable Growth Rate = (Net Income / Equity) x (1 - Dividend Payout Ratio)

Sustainable Growth Rate = ($63,000 / $168,500) x (1 - 0.6) = 0.372 x 0.4 = 0.1488

The sustainable growth rate is 14.88%, which is closest to option c) 14.33%.