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 = 2.20; profit margin = 6%; payout ratio = 40%; equity/assets = .50. (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 = 2.20; profit margin = 6%; payout ratio = 40%; equity/assets = .50. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Explanation / Answer

as given we need to find the sustainable growth rate and internal growth rate .

we have asset turnover ration = 2.20

profit margin = 5%

payout ratio = 40%

equity/assets = 0.50

1)

sustainable growth rate = Retention ratio * ROE

Retention ratio = 1 - payout ratio = 1 - 40% = 1 - 0.40 = 0.60

ROE = return on equity = asset turn over * profit margin = 2.20 * 6% = 13.2 %

so,

sustainable growth rate = 0.60 * 13.2% = 7.92 %

2)

Internal growth rate = Retention ratio * ROE * equity/assets

Retention ratio = 1 - payout ratio = 1 - 40% = 1 - 0.40 = 0.60

ROE = return on equity = asset turn over * profit margin = 2.20 * 6% = 13.2 %

equity/assets = 0.50

so,

Internal growth rate = 0.60 * 13.2% * 0.50 = 3.96 %

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