A ﬁrm has an 8% proﬁt margin and a .9 ratio of sales to total assets. The ﬁrm maintains a 40% dividend payout ratio and a 10% rate of growth. If the debt-equity ratio is held constant, what must
That rate be?
A) .70
B) .89
C) 1.10
D) 1.52
E) 1.70

Question

Quizplus · Accepted Answer

The sustainable growth rate formula is ROE * (1 - dividend payout ratio). ROE can be calculated as (Profit Margin * Asset Turnover * Equity Multiplier). Given the profit margin, asset turnover, and growth rate, the equity multiplier (1 + Debt/Equity ratio) can be solved to maintain the growth rate.

A ﬁRm Has an 8% Proﬁt Margin and a