Your company wants a sustainable growth rate of 3.45% while maintaining a 30 percent dividend payout ratio and a 7% proﬁt margin. The company has a capital intensity ratio of 1.5. What is the
Equity multiplier that is required to achieve the company's desired rate of growth?

Question

Quizplus · Accepted Answer

The sustainable growth rate (SGR) formula is: SGR = ROE * (1 - dividend payout ratio). ROE can be expressed as (Profit Margin * Asset Turnover * Equity Multiplier). Given the SGR of 3.45%, a 30% payout ratio, and a 7% profit margin, we can solve for the Equity Multiplier using the capital intensity ratio (inverse of asset turnover). Solving gives an Equity Multiplier of approximately 1.02.

Your Company Wants a Sustainable Growth Rate of 3