Berger Corporation has a profit margin of 10.0%, total asset turnover of 0.75, financial leverage of 1.6, and debt/equity ratio of 62.5%. Profit margin is defined as
Net income/Sales, total asset turnover is Sales/ Total assets, financial leverage is Total assets/Equity, and debt/equity ratio is Total debt/Equity. Berger\s payout ratio is 60.0%. If these ratios are sustainable for the long term, the best estimate of Berger's growth rate of earnings and dividends is:
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A. B. C.A
To estimate Berger Corporation's growth rate of earnings and dividends, we need to use the sustainable growth rate formula. The sustainable growth rate (SGR) represents the maximum rate at which a company can grow its earnings and dividends without relying on external financing.
The formula for the sustainable growth rate is as follows:
SGR = Profit Margin * Total Asset Turnover * Financial Leverage * Retention Ratio
Where:
Let's calculate each component and then substitute them into the formula:
Profit Margin = 10.0% = 0.10 Total Asset Turnover = 0.75 Financial Leverage = 1.6 Payout Ratio = 60.0% = 0.60 Retention Ratio = 1 - Payout Ratio = 1 - 0.60 = 0.40
Now we can substitute these values into the formula:
SGR = 0.10 * 0.75 * 1.6 * 0.40
Calculating the expression:
SGR = 0.10 * 0.75 * 1.6 * 0.40 = 0.048 = 4.8%
Therefore, the best estimate of Berger Corporation's growth rate of earnings and dividends is 4.8%.
The correct answer is A. 4.8%.