Question

The green giant has a 7 percent profit margin and a 66 percent dividend payout ratio. the total asset turnover is 1.6 and the equity multiplier is 1.6. what is the sustainable rate of growth?

Answer 1

The equation: Sustainable Growth Rate = ROE x (1 - dividend-payout ratio); where ROE is Return on Equity

ROE = Profit Margin(Net income/Sales) x Total Asset Turnover(Sales/Total Assets) x Equity Multiplier(Total Assets/Avg Stockholder's equity)

Solution: Sustainable rate of growth=.07 x 1.6 x 1.6 x (1-.66) =

0.1792 x 0.34=0.060928 or 6.0928%