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# Sustainable growth rate, effective rate of interest

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1) A firm's profit margin is 10% and its asset turnover ratio is .6. It has no debt, has net income of \$10 per share, and pays dividends of \$4 per share. What is the sustainable growth rate?

2) A bank loan has a quoted annual rate of 6%. However, the borrower must maintain a balance of 25% of the amount of the loan, and the balance does not earn any interest.

a) What is the effective rate of interest if the loan is for 1 year and is paid off in one payment at the end of the year?

b) What is the effective rate of interest if the loan is for 1 month?

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#### Solution Preview

1) A firm's profit margin is 10% and its asset turnover ratio is .6. It has no debt, has net income of \$10 per share, and pays dividends of \$4 per share. What is the sustainable growth rate?

Asset turnover ratio=0.6

Profit margin=10%

Therefore

Earnings on equity=6.00%=0.6*0.1

Earning per share=\$10

Dividend=\$4

Plowback ratio= ...

#### Solution Summary

Answers two questions on : 1) sustainable growth rate, 2) effective rate of interest

\$2.49