To determine the expected growth rate of Company 1 compared to Company 2, we need to consider the given information about dividend payout ratio, return on assets, and financial leverage.
The growth rate of a company can be estimated using the sustainable growth rate (SGR) formula:
SGR = (Return on Assets) × (1 - Dividend Payout Ratio) × (Financial Leverage)
Let's calculate the SGR for Company 1 and Company 2:
SGR1 = (12%)(1 - 37.5%)(1.6) = 7.2%
SGR2 = (10.0%)(1 - 40.0%)(2.0) = 12.0%
Comparing the SGRs, we can see that the SGR for Company 1 is 7.2%, and the SGR for Company 2 is 12.0%.
Since the SGR for Company 1 is lower than the SGR for Company 2, we can conclude that the expected growth rate of Company 1 is lower than that of Company 2.
Therefore, the correct answer is A) lower.