Stop and Go has a 45 percent profit margin and a 15 percent

Stop and Go has a 4.5 percent profit margin and a 15 percent dividend payout ratio. The total asset turnover is 1.6 and the debt-equity ratio is 0.60. What is the sustainable rate of growth? Please clear all the process!

Solution

Sustainable growth rate (SGR) = ROE * (1 - Dividend Payout ratio)

By the values given in question, it is clear that we need to first calculate the ROE using DuPont Equation. According to Du Pont Equation,

ROE = Net profit margin * Total asset turnover * Equity Multiplier

Equity Multiplier = Assets/Equity

Assets = Debt + Equity

Debt-to-equity is given as 0.60. This means, for equity of $1 there is debt of $0.60

Therefore, Assets-to-Equity = (1+0.6)/1 = 1.6

ROE = 4.5% * 1.6 * 1.6 = 11.52%

SGR = 11.52% * (1 - 15%) = 9.792%