Beaver Industries has a total asset turnover rate of 1.8, an equitymultiplier of
ID: 2770980 • Letter: B
Question
Beaver Industries has a total asset turnover rate of 1.8, an equitymultiplier of 1.2, a profit margin of 7 percent, a retention ratioof .6, and total assets of $300,000. What is the sustainable growthrate? (Hint: Watch your decimal places and order of operations)a. 6.44 percent
b. 9.98 percent
c. 11.09 percent
d. 12.47 percent
e. 19.95 percent
A firm has a return on equity of 14 percent, a return on assets of9.5 percent, and a 30 percent dividend payout ratio. What is thesustainable growth rate?
a. 2.93 percent
b. 4.38 percent
c. 7.12 percent
d. 9.58 percent
e. 10.86percent
Explanation / Answer
Sustainable Growth Rate (SGR) = (ROE * b) / (1-ROE* b)
ROE = Profit Margin * Equity Multiplier * Total AssetsTurnover
ROE = 0.07 * 1.2 * 1.8 = 0.1512 (or)15.12%
SGR = (0.1512 * 0.60 ) / (1-0.1512 * 0.60)
SGR = 0.09078 / 0.90928 = 0.0997 (or) 9.98%
Sustainable Growth Rate (SGR) = 9.98%
Thus, Option is (b) 9.98%
Sustainable Growth Rate (SGR) = (ROE * b) / (1-ROE* b)
1 = Dividend payout ratio + Retention ratio
Retention ratio = b = 1- Dividend payout ratio
Retention ratio = b = 1-0.30 =0.70
SGR = (0.14 * 0.70 ) / (1-0.14* 0.70)
SGR = 0.098 / 0.902 = 0.1086 (or) 10.86%
Thus, Option is (e) 10.86%