The Green Giant has a 6 percent profit margin and a 65 percent dividend payout ratio....

The Green Giant has a 6 percent profit margin and a 65 percent dividend payout ratio. The total asset turnover is 1.5 and the equity multiplier is 1.6. What is the sustainable rate of growth?

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Expert Solution

ROE = (PM)(TAT)(EM)

ROE = (.06)(1.5)(1.6)

ROE = 0.144 or 14.4%

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

b = 1 – 0.65

b = 0.35

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

Sustainable growth rate = [0.144(0.35)] / [1 – 0.144(0.35)]

Sustainable growth rate = 0.0531 or 5.31%

jeff jeffy answered 2 years ago

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