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 the debt-equity ratio is. 54. What is the sustainable rate of growth?

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Business

Abbie York

19 December, 18:42

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 the debt-equity ratio is. 54. What is the sustainable rate of growth?

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Kali Small · Answer 1

First we calculate the return on equity (ROE) based on the Du-pont equation

ROE = Net profit margin * Total asset turnover * equity multiplier

Total asset turnover = 1/capital intensity = 1/1.08

Equity multiplier = 1 + debt to equity = 1 + 0.54 = 1.54

net profit margin = 6.2% = 0.062

ROE = 0.062*1/1.08*1.54 = 0.0884 = 8.84%

Sustainable growth rate = ROE * (1 - dividend payout)

Sustainable growth rate = 0.0884 * (1-0.4)

Sustainable growth rate = 0.053 = 5.3%

Sustainable growth rate = 5.30%