Basic Motors has a profit margin of 5.6 percent, a total asset turnover of 1.76, a total debt ratio of .2, and a dividend payout ratio of .7. What is the sustainable growth rate?

Question

Quizplus · Accepted Answer

The sustainable growth rate (SGR) is calculated using the formula: SGR = ROE * (1 - dividend payout ratio). First, calculate the Return on Equity (ROE) using the formula: ROE = Profit Margin * Total Asset Turnover * Equity Multiplier. The Equity Multiplier is 1 / (1 - Total Debt Ratio). Plugging in the values: ROE = 0.056 * 1.76 * (1 / (1 - 0.2)) = 0.1232. Then, SGR = 0.1232 * (1 - 0.7) = 0.03696 or approximately 3.84 percent.

Basic Motors Has a Profit Margin of 5