Blackstone Inc. has a return on sales of 15%, a total asset turnover of 1.2 and a debt ratio of 30%. If the company is projecting a dividend payout ratio of 80%, calculate the firms' sustainable growth rate.
A)5.15%
B)8.25%
C)10.35%
D)13.45%

Question

Quizplus · Accepted Answer

The sustainable growth rate (SGR) can be calculated using the formula: SGR = ROE * (1 - dividend payout ratio), where ROE (Return on Equity) can be derived from the given return on sales (profit margin), total asset turnover, and debt ratio. First, calculate ROE using the DuPont identity, which is ROE = Profit Margin * Total Asset Turnover * Equity Multiplier. Given a return on sales (profit margin) of 15%, a total asset turnover of 1.2, and a debt ratio of 30% (implying an equity multiplier of 1/(1-0.3) = 1.4286), ROE = 0.15 * 1.2 * 1.4286 = 25.71%. With a dividend payout ratio of 80%, the retention ratio (b) is 1 - 0.8 = 0.2. Therefore, SGR = 25.71% * 0.2 = 5.142%, which rounds to 5.15%.