Question

1)Stop and Shop Supermarkets has a 4.5% profit margin and a 25% dividend payout ratio. The total asset turnover is 1.5 and its debt-equity ratio is 0.6. What is its sustainable rate of growth?

2)Trader Joe’s has a 9% percent return on assets and a 75% percent retention ratio. What is its internal growth rate?

Answer 1

1.Debt-equity ratio=Debt/Equity

Hence debt=0.6equity

Total assets=debt+equity

1.6equity

Equity multiplier=Total assets/equity

1.6equity/equity

=1.6

ROE=(Profit margin*Total asset turnover*Equity multiplier)

=(0.045*1.5*1.6)

=0.108

Retention ratio=1-payout ratio

=(1-0.25)=0.75

Sustainable growth rate=(ROE*Retention ratio)/[1-(ROE*Retention ratio)]

(0.108*0.75)/[1- (0.108*0.75)]
=8.81%(Approx)

2.

Internal growth rate=(ROA*Retention ratio)/[1-(ROA*Retention ratio)]

=(0.09*0.75)/[1-(0.09*0.75)]

=7.24%(Approx).