Question

Is the Expert answer right - please recalculate - Shouldn't retention rate for sustainable growth calc = .53 ??? "R. N. C., Inc., desires a sustainable growth rate of 2.99 percent while maintaining a 43 percent dividend payout ratio and a profit margin of 4 percent. The company has a capital intensity ratio of 1.8. What equity multiplier is required to achieve the company's desired rate of growth? Expert Answer shrikant answered this Was this answer helpful? 1 0 1,249 answers Sustainable growth rste = ROE*(1- divedend payout ratio) / (1 - ROE*(1-divedend payout ratio) 0.0299 = ROE*(0.47) / 1 - 0.47*ROE 0.0299 - 0.0141ROE = 0.47ROE So ROE = 0.0618 ROE = profit margin*(1/capital intensity ratio)*Equity multiper 0.0618 = 0.04 *(1/1.8)* Equity multoplier So equity multiplier is 2.718

Answer 1

Dividend Payout Ratio = 0.43

Retention Ratio, b = 1 - Dividend Payout Ratio
Retention Ratio, b = 1 - 0.43
Retention Ratio, b = 0.57

Sustainable Growth Rate = [ROE * b] / [1 - ROE * b]
0.0299 = [ROE * 0.57] / [1 - ROE * 0.57]
0.0299 * [1 - ROE * 0.57] = [ROE * 0.57]
0.0299 - ROE * 0.017043 = ROE * 0.57
0.0299 = ROE * 0.587043
ROE = 0.0509 or 5.09%

Capital Intensity Ratio = Total Assets / Sales
1.80 = Total Assets / Sales
Sales / Total Assets = 1 / 1.80
Total Assets Turnover = 1 / 1.80

ROE = Profit Margin * Total Assets Ratio * Equity Multiplier
0.0509 = 0.040 * (1 / 1.80) * Equity Multiplier
Equity Multiplier = 2.29