Question

Assume the following ratios are constant: Total asset turnover 2 Profit margin 5.1 % Equity multiplier 1.2 Payout ratio 25 % What is the sustainable growth rate?

Answer 1

1]	Per DuPont, ROE = [Net income/Sales]*[Sales/Total Assets]*[Total assets/Equity]
	That is, ROE = Profit margin*Asset turnover*Equity Multiplier
	Thus ROE = 2*5.1%*1.2 =	12.24%
2]	SGR = ROE*b [where ROE is calculated using beginning equity], where b =
	retention rate. Retention ratio = 1/25% = 75%
	So, SGR = 0.1224*0.75 =	9.18%
	If current equity is used for calculating ROE,
	SGR = ROE*b/(1-ROE*b)
	So, SGR = 0.1224*0.75/(1-0.1224*0.75) =	10.11%