Question

Stop and Go has a 4 percent profit margin and a 43 percent dividend payout ratio. The total asset turnover is 1.65 and the debt-equity ratio is .70. What is the sustainable rate of growth

Answer 1

Answer:

6.83%

Explanation:

Given :

Profit margin = 4% = 0.04

Dividend payout ratio = 43% = 0.43

Asset turnover = 1.65

Debt to equity = .7

The retention rate is 1 - the payout ratio = 1 - 0.43 = 0.57

The sustainable growth rate is given by :

(ROE * Retention Rate) / (1 - (ROE * Retention Rate))

Return on Equity (ROE) :

Profit margin * Asset turnover * Equity multiplier

Equity ratio = debt to equity ratio + 1 = 0.7 + 1 = 1.7

= 0.04 * 1.65 * 1.7 = 0.1122

Sustainable growth rate :

(ROE * Retention Rate) / (1 - (ROE * Retention Rate))

(0.1122 * 0.57) / (1 - (0.1122 * 0.57))

0.063954 / 0.936046

= 0.0683235

= 6.83%