Question

The Green Giant has a 7 percent profit margin and a 61 percent dividend payout ratio. The total asset turnover is 1.4 times and the equity multiplier is 1.6 times. What is the sustainable rate of growth

Answer 1

5.17%

Step-by-step explanation:

The green giant has a 7% profit margin

= 7/100

= 0.07

The dividend payout ratio is 67%

= 67/100

= 0.67

Total turnover is 1.4 times

Equity multiplier is 1.6 times

The first step is to calculate the return of equity

ROE= profit margin×total turnover×equity multiplier

= 0.07×1.4×1.6

= 0.1568

Therefore, the sustainable rate of growth can be calculated as follows

= return of equity×(1-dividend payout ratio)

= 0.1568×(1-0.67)

= 0.1568×0.33

= 0.0517×100

= 5.17%

Hence the sustainable rate of growth is 5.17%