Question

Compute the sustainable growth rate for Hazard Co using the information on the following ratios for the company. You may assume the ratios are constant over time. Total asset turnover 1.29 Profit margin 8.9% Equity multiplier 1.7 Payout ratio 61%

Multiple Choice -3.04% 8.24% 13.61% -4.67% 8.44%

Answer 1

The growth rate is computed as shown below:

= (ROE x b) / (1 - ROE x b)

ROE is computed as follows:

= Profit margin x Equity multiplier x Total Asset turnover

= 8.9% x 1.7 x 1.29

= 0.195177

b is computed as follows:

= 1 - payout ratio

= 1 - 0.61

= 0.39

So, the growth rate will be as follows:

= (0.195177 x 0.39) / (1 - 0.195177 x 0.39)

= 0.07611903 / 0.92388097

= 8.24% Approximately