Robotics desires a sustainable growth rate of 12.7 percent while maintaining a constant dividend payout ratio of 25 percent and a profit margin of 12 percent. The company has a capital intensity ratio of .95. What equity multiplier is required to achieve the company's desired rate of growth?

Question

Quizplus · Accepted Answer

The sustainable growth rate can be calculated as follows:

Sustainable Growth Rate = Retention Ratio * Return on Equity

where

Retention Ratio = 1 - Dividend Payout Ratio = 1 - 0.25 = 0.75
Return on Equity = Profit Margin * Equity Multiplier = 0.12 * EM

Substituting the values in the formula, we get:

12.7% = 0.75 * 0.12 * EM

EM = 1.7 / 0.12 = 14.17

Equity Multiplier = Debt/Equity = 1 / (1 - Capital Intensity Ratio) = 1 / (1 - 0.95) = 20

Hence,

Equity Multiplier = 14.17 / 0.12 = 1.18 or 1.19 (approx.)

Therefore, the correct answer is D) 1.19.

Robotics Desires a Sustainable Growth Rate of 12