DigIt! Corporation has the following financial information: its profit margin is 10%,its total asset turnover is 1.75,its assets to equity ratio is 1.5,and it pays out 35% of its earnings in dividends.What is its sustainable growth rate?

Question

Quizplus · Accepted Answer

The formula for sustainable growth rate is: SG = ROE x (1 - Dividend payout ratio)
- We need to calculate ROE first: ROE = Profit margin x Total asset turnover x Assets to equity ratio
- ROE = 10% x 1.75 x 1.5 = 26.25%
- Dividend payout ratio is given as 35%
- Plug in the values in the formula for SG: SG = 26.25% x (1 - 0.35) = 17.06%
- Therefore, the sustainable growth rate for DigIt! Corporation is 20.57% (rounded to two decimal places).

DigIt! Corporation Has the Following Financial Information: Its Profit Margin