Assume the following ratios are constant Total asset turnove

Assume the following ratios are constant: Total asset turnover Profit margin Equity multiplier Payout ratio 2.6 5.5% 1.4 20% 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.)

Solution

first let us calculate,

Return on Equity = (profit margin) *(total asset turnover) *(equity multiplier).

=> (5.5%) (2.6) (1.4)

=>20.02%.

sustainable growth rate = return on equity * retention rate

here,

retention rate = (1 - payout ratio)

=> 1 - 0.20 =>0.80.

now,

=> 20.02% * (1-0.20)

=16.02%