Question

The green giant has 4 percent profit margin and a 30 percent dividend payout ratio. The total assets turnover is 1.2 times and the equity multiplier is 1.6. What is the sustainable rate of growth?

Answer 1

Answer:

5.68%

Explanation:

The green giant has a 4% profit ratio

= 4/100

= 0.04

The dividend payout ratio is 30%

= 30/100

= 0.3

The total assets turnover is 1.2 times

The equity multiplier is 1.6

The first step is to calculate the return on equity

ROE= Profit margin×Total assets turnover×Equity multiplier

= 0.04×1.2×1.6

= 0.0768 or 7.68%

The next step is to calculate the Plowback ratio

b = 1-dividend payout ratio

b = 1-0.3

b = 0.7

Therefore, the sustainable growth rate can be calculated as follows

= ROE×b/(1-(ROE×b)

= 0.0768×0.7/(1-(0.0768×0.7)

= 0.05376/(1-0.05376)

= 0.05376/0.94624

= 0.05681

= 5.68%

Hence the sustainable rate of growth is 5.68%