Question

The Green Giant has a 5 percent profit margin and a 34 percent dividend payout ratio. The total asset turnover is 16 times and the equity multiplier is 15 times. What is the sustainable rate of growth Multiple Choice Ο Ο 16 32% Ο Ο 12,009, Ο Ο 2,40% Ο 8605 Ο Ο 12905

Answer 1

Answer :- Calculation of Sustainable Rate of Growth =

Profit Margin = 5% = 0.05

Dividend Payout Ratio = 34% = 0.34

Total assets turnover = 1.6 times

Equity Multiplier = 1.5 times

First Calculate the return of equity = 0.05 * 1.6 * 1.5 = 0.12

Sustainable Rate of Growth ={0.12*(1-0.34)}/{1-[0.12*(1-0.34)]}

Sustainable Rate of Growth = 0.0792 / 1- 0.0792

Sustainable Rate of Growth = 8.60%

So the correct answer is option D ( 8.60%).

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