Question

Suppose a firm has a net profit margin of 15%, sales of $155 million, assets of $312 million, and owner's equity of $223 million. If the dividend payout ratio is 10%, what is the firm's sustainable growth rate?

Answer 1

2.7%.

Step-by-step explanation:.

Given:

Net profit margin ( profitability rate) = 15%

Total sales = $155 million

Total assets = $312 million

Total equity = $223 million.

Dividend rate = 10%

Question asked:

What is the firm's sustainable growth rate ?

First of all we will find these thing.

1. Asset utilization rate =
`(Total \ sales)/(Total \ assets)`

=
`(155)/(312) = 0.496\ million= 0.5\%`

2. Financial utilization rate =
`(Total\ debt)/(Total\ equity) \\`

Total debt = Total asset - Total equity

= $312 million - $223 million = $89 million

=
`(89)/(223) = 0.4\%`

3. Return on equity rate = Asset utilization rate
`*` profitability rate

Return on equity rate =
`0.5*15*0.4=3\%`

4. Business retention rate = 100 - Dividend rate

= 100 - 10 = 90%

Now, finally we will calculate sustainable growth rate :

Sustainable growth rate = Return on equity rate
`*` Business retention rate

=
`3\%*90\%=2.7\%`

Therefore, firm's sustainable growth rate is 2.7%