Question

Assume the following ratios are constant. Total asset turnover = 2.30 Profit margin = 5.8 % Equity multiplier = 1.77 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

Return on Equity, ROE = Profit Margin * Total Asset Turnover *
Equity Multiplier

Return on Equity, ROE = 5.8% * 2.30 * 1.77

Return on Equity, ROE = 23.612%

Retention Ratio, b = 100% - Payout Ratio

Retention Ratio, b = 100% - 35%

Retention Ratio, b = 65%

Sustainable Growth Rate = [ROE * b] / [1 - ROE * b]

Sustainable Growth Rate = [0.23612 * 0.65] / [1 - 0.23612 *
0.65]

Sustainable Growth Rate = 0.153478 / 0.846522

Sustainable Growth Rate = 0.1813

Sustainable Growth Rate = 18.13%

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