Answer:
sustainable growth rate = 5.04%
Explanation:
the sustainable growth rate = retention rate x return on equity
- retention rate = 1 - dividend payout ratio = 1 - 40% = 60%
- return on equity = profit margin x asset turnover x equity multiplier = 4% x 1.5 x 1.4 = 0.084 = 8.4%
sustainable growth rate = 0.6 x 8.4% = 5.04%
the mathematical explanation on how I determined ROE:
equity multiplier = total assets / equity
1.4 equity = total assets
total assets turnover = net sales / total assets
1.5 = net sales / 1.4 equity
2.1 equity = net sales
profit margin = net profit / net sales
net sales = net profit / 0.04
2.1 equity = net profit / 0.04
2.1 x 0.04 = net profit / equity = ROE = 0.084
