The Green Giant has a 4 percent profit margin and a 30 percent dividend payout ratio. The total asset turnover is 1.2 and the equity multiplier is 1.5. What is the sustainable rate of growth? Solution Growth rate = Earning retention ratio x Return on equity ROE = 4% x 1.20 x 1.5 = 70% x 1.20 x 4% x 1.5 = 5.04%.

1. The Green Giant has a 4 percent profit margin and a 30 percent dividend payout ratio. The total
asset turnover is 1.2 and the equity multiplier is 1.5. What is the sustainable rate of growth?
Solution
Growth rate = Earning retention ratio x Return on equity
ROE = 4% x 1.20 x 1.5
= 70% x 1.20 x 4% x 1.5
= 5.04%