A firm has a debt ratio of 45 percent, capital intensity ratio is 1.3 times, profit margin is 10 percent, and dividend payout ratio is 30 percent. Calculate the sustainable growth rate for the firm.

Question

Quizplus · Accepted Answer

The sustainable growth rate (SGR) is calculated using the formula: SGR = ROE * (1 - Dividend Payout Ratio). First, calculate ROE: ROE = Profit Margin * Asset Turnover * Equity Multiplier. Asset Turnover = 1/Capital Intensity Ratio = 1/1.3. Equity Multiplier = 1/(1 - Debt Ratio) = 1/(1 - 0.45). Then, ROE = 0.10 * (1/1.3) * (1/0.55). Finally, SGR = ROE * (1 - 0.30) = 3.05%.

A Firm Has a Debt Ratio of 45 Percent, Capital