Question

A company wants a sustainable growth rate of 2.69 while maintaining a 40% dividend payout raito and a profit margin of 5 percent. The company has a capital intensity ratio of 1.5. What equity multiplier is requried to achieve the company's desired rate of growth

A.1.31

B. 1.91

C. 1.24

D. 1.95

Answer 1

Answer: A 1.31

Growth rate
= Retention ratio x ROE
= (100 - Payout ratio) x (Profit margin x Asset turnover x Equity multiplier)

Capital Intensity Ratio = 1.5

Capital intensity Ratio is the reciprocal of Asset Turnover Ratio

Therefore, Asset turnover ratio= 1/1.5 = 0.67

Now, Growth rate = (100 - Payout ratio) x (Profit margin x Asset turnover x Equity multiplier)

2.69% = (100-40)% * (0.05* 0.67* Equity Multiplier)

Therefore, Equity Multiplier= 1.33 which is closest to option A i.e. 1.31