Question

g Use the company's financial information below to help answer this question: Sales 5000 Operating Income 1000 Net Income 500 Dividends Paid 200 Total Assets Turnover 2.0 Leverage Ratio 2.0 The company's sustainable long term growth rate is closest to: HINT: gLT

Answer 1

24%

Step-by-step explanation:

Missing word "Profit margin 10%"

Profit = Sales * Profit margin = $5000*10% = $500

Dividend payout ratio = Dividend paid / Profit = $200 / $500 = 0.4

Retention ratio = 1 - Dividend payout ratio = 1 - 0.4 = 0.6

Return on Equity (As per DuPont equation) = Net profit margin * Asset turnover ratio * Financial leverage = 10% * 2.0 * 2.0 = 0.4 = 40%

Sustainable growth rate = Retention ratio x Return on equity = 0.60 * 40% = 0.24 = 24%