Question

The Green Giant has a 6 percent profit margin and a 37 percent dividend payout ratio. The total asset turnover is 1.2 times and the equity multiplier is 1.4 times. What is the sustainable rate of growth

Answer 1

0.0678

Step-by-step explanation:

Given:

Profit margin = 6% = 0.06

Dividend payout ratio = 37% = 0.37

Total asset turnover = 1.2

Equity multiplier = 1.4

Required:

Find the sustainable rate of growth.

First find the return on equity using the formula: Equity Multiplier × Assets turnover × Profit margin

= 1.4 * 1.2 * 0.06

= 0.1008

Return on equity = 0.1008

To find the sustainable growth, we have the following:

`= (0.1008 (1 - 0.37))/(1 - (0.1008 (1 - 0.37)))`

`= (0.063504)/(1 - 0.063504) = 0.0678`

Therefore, sustainable growth = 0.0678