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Unformatted text preview: ratio is: b = 1 .25 b = .75 Now we can use the sustainable growth rate equation to get: Sustainable growth rate = (ROE b) / [1 (ROE b)] Sustainable growth rate = [.15(.75)] / [1 .15(.75)] Sustainable growth rate = .1268 or 12.68% 14. We first must calculate the ROE to calculate the sustainable growth rate. To do this we must realize two other relationships. The total asset turnover is the inverse of the capital intensity ratio, and the equity multiplier is 1 + D/E. Using these relationships, we get: ROE = (PM)(TAT)(EM) ROE = (.082)(1/.75)(1 + .40) ROE = .1531 or 15.31% The plowback ratio is one minus the dividend payout ratio, so: b = 1 ($12,000 / $43,000) b = .7209 Now we can use the sustainable growth rate equation to get: Sustainable growth rate = (ROE b) / [1 (ROE b)] Sustainable growth rate = [.1531(.7209)] / [1 .1531(.7209)] Sustainable growth rate = .1240 or 12.40%...
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This note was uploaded on 07/15/2010 for the course FINANCE 318 taught by Professor Spurlin during the Spring '08 term at LA Tech.
- Spring '08