Find the sustainable and internal growth rates for a firm with the following rat

Question

Find the sustainable and internal growth rates for a firm with the following ratios: asset turnover = 2.40; profit margin = 5%; payout ratio = 30%; equity/assets = .40. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Find the sustainable and internal growth rates for a firm with the following ratios: asset turnover = 2.40; profit margin = 5%; payout ratio = 30%; equity/assets = .40. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Explanation / Answer

Retention Ratio (b):

= 1 -payout ratio

= 1-0.3

= 0.7

ROA = profit margin * Total asset turnover

= 2.40*0.05

= 12%

Equity multiplier = 1/0.4 = 2.5

ROE = ROA* Equity multiplier

= 0.12*2.5

= 30 %

Internal Growth Rate = (ROA*b) / [1 - (ROA *b)]

= (0.12*0.7)/(1-0.12*0.7)

= 9.17 %

Sustainable Growth Rate = (ROE*b) / [1 - (ROE *b)]

= (0.3*0.7)/(1-0.3*0.7)

= 26.58 %

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