Question

Assume the following ratios are constant: Total asset turnover 3.00 Profit margin 5.9 % Equity multiplier 1.50 Payout ratio 35 % What is the sustainable growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Sustainable growth rate %.

Answer 1

Answer:

Sustainable growth rate = 20.86%

Explanation:

Given the total asset turnover = 3

Profit margin = 5.9%

Equity multiplier = 1.50

Payout ratio = 35%

Sustainable growth rate =  ROE * (1 – payout ratio) / 1- ROE * (1 – Payout ratio)

ROE = Profit margin * total asset turnover * equity multiplier  

ROE = 5.9 * 3 * 1.5

ROE = 26.55%

Sustainable growth rate = 0.2655 * (1-0.35) / 1 – 0.2655 * (1-0.35)

Sustainable growth rate = 20.86%