Growth Rate Question

[Odyssey1]

For a given par value, which of the following debt issues will have the highest cash flows from financing?
Net profit margin
15%
Sales
$10,000,000
Interest payments
$1,200,000
Avg. assets
$15,000,000
Equity
$11,000,000
Avg. working capital
$800,000
Dividend payout rate
35%
Which of the following is the closest estimate of the firm’s sustainable growth rate?
a:8%
b:10%
c:9%
(ANS c)
ROE = Net Profit Margin * Asset turnover * Leverage = .15*.67*1.1364 =0.137
Growth = (1- Div rate )* ROW = 8.9%
Can someone please explain how to get asset turnover and leverage?
Thanks

 

[Oscar]

Asset Turnover = Sales / Average Assets = 10/15 = 0.67
Financial Leverage = Average Assets / Average Equity = 15/11 = 1.362

To calculate the ROE instead of using all the components of the Du-Pont formula it might be quicker to calculate the ROE directly as all the information is there:
ROE = NI / Equity = (10*15%)/11 = 0.137
From there you calculate the the sustainable growth rate b:
b = retention rate * ROE = (1-0.35) * 0.137 = 0.0886 = 8.86
Regards,
Oscar