The Green Giant has a 7 percent profit margin and a 38 percent dividend payout ratio....

The Green Giant has a 7 percent profit margin and a 38 percent dividend payout ratio. The total asset turnover is 1.3 times and the equity multiplier is 1.4 times. What is the sustainable rate of growth?

A. 12.01%

B. 8.58%

C. 9.88%

D. 12.74%

E. 1.82%

Expert Solution

ROE = (PM)(TAT)(EM)

ROE = (0.07)(1.3)(1.4)

ROE = 0.1274 or 12.74%

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

b = 1 – 0.38

b = 0.62

Sustainable growth rate = (ROE × b) / [1 – (ROE × b)]

Sustainable growth rate = [0.1274(0.62)] / [1 – 0.1274(0.62)]

Sustainable growth rate = 0.0858 or 8.58%

jeff jeffy answered 2 years ago

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