Assume the following ratios are constant:

Assume the following ratios are constant:

Total asset turnover		2.5
Profit margin		5.2	%
Equity multiplier		1.3
Payout ratio		22	%

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.)

Sustainable growth rate

%

 

Explanation:

We must first calculate the ROE using the DuPont ratio to calculate the sustainable growth rate. The ROE is:

ROE	=	(PM)(TAT)(EM)
ROE	=	(.052)(2.5)(1.3)
ROE	=	.1690, or 16.90%

The plowback ratio is one minus the dividend payout ratio, so:

b	=	1 – .22
b	=	.78

Now we can use the sustainable growth rate equation to get:

Sustainable growth rate	=	(ROE × b) / [1 – (ROE × b)]
Sustainable growth rate	=	[.1690(.78)] / [1 – .1690(.78)]
Sustainable growth rate	=	.1518, or 15.18%