Question

Assume the following ratios are constant.

Total asset turnover = 2.32
Profit margin = 6.0 %
Equity multiplier = 1.79
Payout ratio = 33 %

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.)

Answer 1

The sustainable growth rate can be calculated using the following formula:

Sustainable Growth Rate = (Profit Margin * Retention Ratio) / (1 - (Profit Margin * Retention Ratio))

First, we need to calculate the retention ratio, which is equal to 1 - Payout Ratio:

Retention Ratio = 1 - 0.33 = 0.67

Now, we can calculate the sustainable growth rate:

Sustainable Growth Rate = (0.06 * 0.67) / (1 - (0.06 * 0.67))

Sustainable Growth Rate ≈ 0.0409 or 4.09%

So, the sustainable growth rate is approximately 4.09%, rounded to 2 decimal places.