Question

16- A company has a gross profit margin of 50%, net profit margin of 10%, dividend payout ratio of 40%, asset turnover of 0.8, financial leverage of 2.5. What is the company’s sustainable growth rate?

Answer 1

First we will calculate Return on Equity (ROE) using DUPont analysis formula:-

ROE = Net Profit Margin*Asset turnover*Financial Leverage

= 10%*0.8*2.5

= 20%

Now, Calculating Sustainable Growth Rate:-

Sustainable Growth Rate = ROE*(1-Dividend Payout Ratio)

= 20%*(1-0.40)

= 12%

So, the company’s sustainable growth rate is 12%

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