Assume the following ratios are constant: Total asset turnover 3.50 Profit margin 6.4 % Equity multiplier 1.70 Payout ratio 35 % What is the sustainable growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

32.98%

Explanation:

From the the question above, the total assets turnover is 3.50

The profit margin is 6.4%

= 6.4/100

= 0.064

The equity multiplier is 1.70

The dividend payout ratio is 35%

= 35/100

= 0.35

The first step is to calculate the return on equity

ROE= Profit margin×Total assets×Equity multiplier

ROE= 0.064×3.50×1.70

ROE= 0.381×100

ROE= 38.1%

The next step is to calculate the plow back ratio

Plowback ratio= 1-dividend payout ratio

= 1-0.35

= 0.65

Therefore, the sustainable growth rate can be calculated as follows

= (ROE×Plowback ratio)/[1-(ROE-Plowback ratio)]

= (0.381×0.65)/[1-(0.381-0.65)]

= 0.248/1-0.248

= 0.248/0.752

= 0.3298×100

= 32.98%

Hence the sustainable growth rate is 32.98%

answerreactive approach;