Explanation:
A. Incorrect because it assumed the sustainable growth rate = (1 - payout ratio) × ROA, where ROA = Net income / Average total assets = 1,500/11,500 = 0.1304. Thus the sustainable growth rate = (1 - 0.45) × 0.1304 = 0.55 × 0.1304 = 0.0717 = 7%. B. Incorrect because it assumed the sustainable growth rate = Payout ratio × ROE, where ROE = Net income / Average shareholders' equity = 1,500 / 7,500 = 0.2. Thus sustainable growth rate is calculated as = 0.45 × 0.2 = 0.09 = 9%. C. Correct because the sustainable growth rate = Retention rate × ROE, where the retention rate = (1- payout ratio) and ROE = Net income / Average shareholders' equity. Thus sustainable growth rate = (1 - 0.45) × 1,500/7,500 = 0.55 × 0.2 = 0.11 = 11%.
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An analyst gathers the following information (in $ millions) about a company's fiscal year:
| Net income | 1,500 |
|---|---|
| Average total assets | 11,500 |
| Average shareholders' equity | 7,500 |
If the dividend payout ratio is 45%, the sustainable growth rate is closest to:
A
7%
B
9%
C
11%