The green giant has a 8 percent profit margin and a 67 percent dividend payout ratio. the total asset turnover is 1.3 times and the equity multiplier is 1.6 times. what is the sustainable rate of growth?
Profit margin of green giant = 8% = 0.08 Dividend payout ratio = 67% = 0.67 Total turnover = 1.3 times Equality multiplier = 1.6 times First calculate the return of equity = profit margin x turnover x equality multiplier Return of Equity = 0.08 x 1.3 x 1.6 = 0.1664 Now the sustainable rate of growth = Return of Equity x (1 - Dividend payout ratio) Sustainable rate = 0.1664 x (1 - 0.67) = 0.1664 x 0.33 = 0.055 Sustainable rate of growth = 5.5%
