Aisle's Markets has a 7% proﬁt margin and a 60 percent dividend payout ratio. The total asset turnover is 1.35 and the debt-equity ratio is .60. What is the sustainable rate of growth?

Question

Quizplus · Accepted Answer

Sustainable Growth Rate = ROE x Retention Ratio

ROE = Profit Margin x Total Asset Turnover x Equity Multiplier
- Equity Multiplier = 1 + Debt/Equity Ratio
- Profit Margin = 7%
- Total Asset Turnover = 1.35
- Debt/Equity Ratio = 0.60
- Equity Multiplier = 1 + 0.60 = 1.60
- ROE = 7% x 1.35 x 1.60 = 14.28%

Retention Ratio = 1 - Dividend Payout Ratio
- Dividend Payout Ratio = 60%
- Retention Ratio = 1 - 0.60 = 0.40

Sustainable Growth Rate = 14.28% x 0.40 = 5.71%

Therefore, the closest option is C) 6.44%.

Aisle's Markets Has a 7% Proﬁt Margin and a 60