Question

Assume the following ratios are constant.

Total asset turnover	=	2.23
Profit margin	=	5.1	%
Equity multiplier	=	1.70
Payout ratio	=	48	%

What is the sustainable growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Sustainable growth rate ________ %

Answer 1

We must first calculate the ROE using the DuPont ratio to calculate the sustainable growth rate. The ROE is:

ROE = (PM)(TAT)(EM)

ROE = (.051)(2.23)(1.70)

ROE = 0.1933 or 19.33%

The plowback ratio is one minus the dividend payout ratio, so:

b = 1 - 0.48

b = 0.52

Now we can use the sustainable growth rate equation to get:

Sustainable growth rate = (ROE × b) / [1 – (ROE × b)]

Sustainable growth rate = [0.1933(0.52)] / [1 - 0.1933(0.52)]

Sustainable growth rate = 0.1118, or 11.18%