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rewona
14 days ago
8

The blue giant has a profit margin of 6.2 percent and a dividend payout ratio of 40 percent. The capital intensity is 1.08 and t

he debt-equity ratio is .54. What is the sustainable rate of growth?
Business
1 answer:
marusya05 [3K]14 days ago
6 0
Initially, we determine the return on equity (ROE) using the Du-Pont formula: ROE = Net profit margin * Total asset turnover * equity multiplier. The total asset turnover can be calculated as 1/capital intensity = 1/1.08. The equity multiplier is figured as 1 + debt/equity, which results in 1 + 0.54 = 1.54. The net profit margin is 6.2%, equivalent to 0.062. Thus, ROE = 0.062 * 1/1.08 * 1.54 = 0.0884, or 8.84%. The sustainable growth rate formula is ROE * (1 - dividend payout). Hence, the sustainable growth rate equals 0.0884 * (1 - 0.4), which leads to 0.053, or 5.3%. Therefore, the sustainable growth rate is 5.30%.
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