Assume the following ratios are constant. Total asset turnover 1.61 Profit margin 8.1% Equity multiplier 1.3 Payout ratio 55% What is the sustainable growth rate?
Assume the following ratios are constant. Total asset turnover 1.61 Profit margin 8.1% Equity multiplier 1.3 Payout ratio 55% What is the sustainable growth rate?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
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Kk.163.
![**Understanding Financial Ratios and Sustainable Growth Rate**
### Assume the following ratios are constant:
- **Total asset turnover:** 1.61
- **Profit margin:** 8.1%
- **Equity multiplier:** 1.3
- **Payout ratio:** 55%
Question: *What is the sustainable growth rate?*
---
### Explanation:
The image provides a set of financial ratios which are often used to analyze a company's efficiency and profitability.
1. **Total Asset Turnover (TAT):** This ratio measures how efficiently a company uses its assets to generate sales. A TAT of 1.61 indicates that for every dollar invested in assets, the company generates $1.61 in sales.
2. **Profit Margin:** This ratio reveals the percentage of revenue that is converted into profit after all expenses. A profit margin of 8.1% signifies that the company earns $0.081 for every dollar of revenue.
3. **Equity Multiplier:** This reflects the company's financial leverage by comparing total assets to total equity. An equity multiplier of 1.3 suggests that the company uses $1.30 in assets for every dollar of equity.
4. **Payout Ratio:** This ratio shows the proportion of earnings distributed as dividends to shareholders. A payout ratio of 55% means the company pays out 55% of its earnings as dividends and retains 45% for reinvestment.
To calculate the **sustainable growth rate (SGR)**, you can use the formula:
\[ \text{SGR} = \text{ROE} \times (1 - \text{Payout Ratio}) \]
Where:
- ROE (Return on Equity) can be calculated using the given ratios:
\[ \text{ROE} = \text{Profit Margin} \times \text{Total Asset Turnover} \times \text{Equity Multiplier} \]
Let's break it down step by step:
1. **Calculate ROE**:
\[ \text{ROE} = 8.1\% \times 1.61 \times 1.3 \]
\[ \text{ROE} = 0.081 \times 1.61 \times 1.3 \]
\[ \text{ROE} ≈ 0.1701 \] or 17.01%
2. **Calculate Retention Ratio**:
\[ 1 - \text](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F6ef2e86f-df5b-40a3-8009-016cf0671dd4%2Fd8a48ab7-ed7a-4958-9837-476ff8cb52e3%2Fg9g7vk5_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Understanding Financial Ratios and Sustainable Growth Rate**
### Assume the following ratios are constant:
- **Total asset turnover:** 1.61
- **Profit margin:** 8.1%
- **Equity multiplier:** 1.3
- **Payout ratio:** 55%
Question: *What is the sustainable growth rate?*
---
### Explanation:
The image provides a set of financial ratios which are often used to analyze a company's efficiency and profitability.
1. **Total Asset Turnover (TAT):** This ratio measures how efficiently a company uses its assets to generate sales. A TAT of 1.61 indicates that for every dollar invested in assets, the company generates $1.61 in sales.
2. **Profit Margin:** This ratio reveals the percentage of revenue that is converted into profit after all expenses. A profit margin of 8.1% signifies that the company earns $0.081 for every dollar of revenue.
3. **Equity Multiplier:** This reflects the company's financial leverage by comparing total assets to total equity. An equity multiplier of 1.3 suggests that the company uses $1.30 in assets for every dollar of equity.
4. **Payout Ratio:** This ratio shows the proportion of earnings distributed as dividends to shareholders. A payout ratio of 55% means the company pays out 55% of its earnings as dividends and retains 45% for reinvestment.
To calculate the **sustainable growth rate (SGR)**, you can use the formula:
\[ \text{SGR} = \text{ROE} \times (1 - \text{Payout Ratio}) \]
Where:
- ROE (Return on Equity) can be calculated using the given ratios:
\[ \text{ROE} = \text{Profit Margin} \times \text{Total Asset Turnover} \times \text{Equity Multiplier} \]
Let's break it down step by step:
1. **Calculate ROE**:
\[ \text{ROE} = 8.1\% \times 1.61 \times 1.3 \]
\[ \text{ROE} = 0.081 \times 1.61 \times 1.3 \]
\[ \text{ROE} ≈ 0.1701 \] or 17.01%
2. **Calculate Retention Ratio**:
\[ 1 - \text
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