Question

Which one of the following has the least effect on a firm's sustainable rate of growth?

A. Debt-equity ratio

B. Quick ratio

C. Capital intensity ratio

D. Dividend policy

E. Profit margin

Answer 1

The correct option is B (quick ratio) Explanation: The growth rate is a depiction that how well a firm could perform in future. Growth rate is measured based on past performance. Sustainable growth rate is the depiction, how much a firm can grow without any external equity. The sustainable growth rate could be computed by multiplying Return on equity (ROE) and retention ratio. The formula to compute the ROE by DuPont equation is as follows: ROE = Net profit margin x Asset turnover x Equity multiplier The formula to compute the retention ratio is as follows: Retention ratio=1-Dividend payout ratio Retention ratio is affected by dividend policy. Return on equity is affected by profit margin, debt-equity ratio and capital intensity ratio. Quick ratio has not much affect on the sustainable growth rate. So, the correct answer is quick ratio.