Sustainable Growth Rate You have located the following information on Rock Company: debt ratio = 46.5%, capital intensity ratio = 2.51 times, profit margin = 21%, and dividend payout ratio = 38%. What is the sustainable growth rate for Rock? (Do not round intermediate steps.)

The correct answer is 10.72% (Approx.).

Explanation:

According to the scenario, the given data are as follows:

Debt ratio = 46.5%

Capital intensity ratio = 2.51 times

Profit margins = 21%

Dividend payout = 38%

Formula to calculate sustainable growth rate ae as follows:

Sustainable growth rate = (Earnings retention rate * Return on equity) / (1 - (ROE * RR)

where, Retention rate = (1 - dividend payout rate)

= (1-0.38) = 0.62

ROE = Profit margin * Total asset turonver * Equity multipler

= Profit margin * 1/capital intensity ratio * 1 / (1-debt ratio)

=.21 * (1/2.51) * 1 / (1-.465)

=.21 * 0.398 * 1.869

= 0.1562

=15.62%

So, Sustainable growth rate = (0.1562*0.62) / 1 - (0.1562*0.62)

= 0.096844 / 0.903156

= 0.1072

= 10.72% (approx.)

Hence, the correct answer is 10.72% (approx.).