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%