Question

Calculate the sustainable growth rate given the following information: debt/equity ratio = 60%; profit margin = 5%; dividend payout ratio = 50%; capital intensity ratio = 1.

Multiple Choice

• 8.26%

• 7.26%

• 5.26%

• 4.26%

• 6.26%

Answer 1

ROE or return on equity will be

=net profit margin*asset turnover ratio*equity multiplier

=net profit margin*(1/capital intensity ratio)*(1+debt/equity ratio)

=5%*(1/1)*(1+60%)

=8.00%

sustainable growth rate

=(8.00%*(1-50%))/(1-(8.00%*(1-50%))

=4.17%, so nearest answer is 4.26%

the above is answer..