Question

Green Caterpillar Garden Supplies Inc. has no debt in its capital structure and has $250,000,000 in assets. Its sales revenues last year were $125,000,000 with a net income of $2,500,000. The company distributed $105,000 as dividends to its shareholders last year. Given the information above, what is Green Caterpillar Garden Supplies Inc.'s sustainable growth rate? 0.04% 0.97% 1.05% O 0.40% Which of the following are assumptions of the sustainable (self-supporting) growth model? Check all that apply. The firm's liabilities and equity must increase at the same rate. The firm pays no dividends. Common stock is the firm's only form of equity. The firm maintains a constant ratio of assets to equity.

Answer 1

Sustainable growth rate is computed by using the below formula:

g = retention ratio x return on equity

retention ratio = 1 - dividend payout ratio

= 1 - $ 105,000 / $ 2,500,000

= 0.958

return on equity = Net Income / Equity

= $ 2,500,000 / $ 250,000,000

= 0.01

So the growth rate will be:

= 0.958 x 0.01

= 0.97% Approximately

So the correct answer is option of 0.97%

The correct answer is option of Common stock is the firm's only form of equity