CFA CFA Level 1 Sustainable growth rate calculation?

Sustainable growth rate calculation?

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    • lulu123
      Participant
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      ROA = 4.8%
      Total asset turnover = 1.92
      Financial leverage = 1.75
      Dividend payout ratio = 48.1%

      The company’s sustainable growth rate is closest to:
      A. 4%
      B. 4.40%
      C. 4.78%

      The answer is B but I can’t figure out how to get there.

      Could anybody tell me the calculation please?

      (PS: how do I put a screenshot into the post? I can only put an image using a web link…)

    • Sophie Macon
      Keymaster
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      @lulu123 – upload your image to imgur.com and copy that link in

    • Sophie Macon
      Keymaster
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      @lulu123 – a hint first, you have to use the formula here for sustainable growth rate = Retention ratio x ROE

    • Sophie Macon
      Keymaster
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      g = RR x ROE
      = (1- Div payout ratio) x (ROA x Financial Leverage)
      = 51.9% x (NI/Avg Assets x Avg Assets/Avg Equity)
      = 51.9% x (4.8% x 1.75)
      = 4.36%

    • lulu123
      Participant
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      @sophie

      hadn’t thought of making ROE = ROA*Leverage!

      thank you

    • Sophie Macon
      Keymaster
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      Yea they threw in asset turnover for fun @lulu123. 😉 You’re welcome!

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