Question

Company A has the following financial data. Assume that the financial ratios of the company are...

Company A has the following financial data. Assume that the financial ratios of the company are constant.

Payout ratio 40%, Total asset $120 million, Total equity $100 million, Profit margin 8%, Total asset turnover 1.4

What is the sustainable growth rate of this company?

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Answer #1

Sustainable Growth rate = Return on equity * Retention ratio

Profit margin on sales = 8% ( GIven)

Total Asset turnover = Net sales/Total Assets

1.4 = Net sales /120

By cross multiplication

120*1.4 = Net sales

168 = Net sales

Profit = Net sales * margin

Profit = 168 * 8% = 13.44

Return on equity = Profit/Equity

Return on equity = 13.44/100 = 13.44%

Retention ratio = 1 - Payout ratio

Growth rate = 13.44% * (1-payout ratio)

= 13.44 % * (1 - 40%)

= 13.44 * 60%

= 8.064%

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