Stop and Go has a 4.5 percent profit margin and a 15 percent dividend payout ratio. The total asset turnover is 1.6 and the debt-equity ratio is 0.60. What is the sustainable rate of growth?

Question

Business

Harley Gomez

25 April, 08:47

Stop and Go has a 4.5 percent profit margin and a 15 percent dividend payout ratio. The total asset turnover is 1.6 and the debt-equity ratio is 0.60. What is the sustainable rate of growth?

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Geovanni Reid · Answer 1

10.85 percent

Explanation:

Return on equity = 0.045 * 1.60 * (1 + 0.60) = 0.1152

Sustainable growth = [0.1152 * (1 - 0.15) ]/{1 - [.1152 * (1 - 0.15) ]} = 10.85 percent

The sustainable growth rate is the rate of growth that a company can expect to see in the long term. Often referred to as G, the sustainable growth rate can be calculated by multiplying a company's earnings retention rate by its return on equity. The growth rate can be calculated on a historical basis and averaged in order to determine the company's average growth rate since its inception.

The sustainable growth rate is an indicator of what stage a company is in, during its life cycle. Understanding where a company is in its life cycle is important.