The Smith Company has determined that the following will be true next year:
T = Ratio of total assets to sales = 1
P = Net profit margin on sales = 5%
D = Dividend-payout ratio = 50%
L = Debt equity ratio = 1
a. What is Smith's sustainable growth rate in sales?
b. Can Smith's actual growth rate in sales be different from its sustainable growth rate? Why or why not?
c. How can Smith change its sustainable growth rate?
a) Sustainable growth rate =ROE*b
b=Retention ration = 1- D = 1-50%=50%
ROA = P*T = 5%*1=5%
This solution shows step-by-step calculations to determine the sustainable growth rate using the appropriate formula. It also explains how the Smith Company can changes its sustainable growth rate and how the growth rate in sale is different from its sustainable growth rate.