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Answer :
The sustainable growth rate of a firm is the maximum rate at which a company can grow its sales, earnings, and dividends without relying on external financing. To calculate the sustainable growth rate, we need to consider the dividend payout ratio and the return on equity (ROE).
In this case, Kaime Ltd has an income of $2.5 million and a dividend payout ratio of 40%. To find the dividend payment, we multiply the income by the dividend payout ratio: 2.5 million x 0.40 = $1 million.
The retained earnings are the income minus the dividend payment: $2.5 million - $1 million = $1.5 million.
To find the return on equity (ROE), we divide the retained earnings by the number of shares outstanding: $1.5 million / 1.5 million shares = $1 per share.
The sustainable growth rate is calculated by multiplying the ROE by the retention ratio (1 - dividend payout ratio): 1 x (1 - 0.40) = 0.60.
Therefore, the sustainable growth rate of Kaime Ltd is 60%, or 2.74% (rounded to two decimal places).
Answer is C. 2.74%.
- Calculate the dividend payment by multiplying the income by the dividend payout ratio.
- Calculate the retained earnings by subtracting the dividend payment from the income.
- Calculate the return on equity (ROE) by dividing the retained earnings by the number of shares outstanding.
- Calculate the sustainable growth rate by multiplying the ROE by the retention ratio (1 - dividend payout ratio).
- The sustainable growth rate of Kaime Ltd is 2.74%.
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