The Sandar Co. has a debt-equity ratio of .5, a profit margin of 3 percent, a dividend payout ratio of 40 percent, and a capital intensity ratio of 1.

What is its sustainable growth rate? If Sandar desired a 10 percent sustainable growth rate and planned to achieve this goal by improving profit margins, what would you think?

For the company to achieve a 10 percent growth rate, the profit margin will have to rise.

To see this, assume that sustainable growth is equal to 10 percent and then solve for profit margin, PM:

For the plan to succeed, the necessary increase in profit margin is substantial, from 3 percent to about 10 percent. This may not be feasible.

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ROE is .03 x 1 x 1.5 = .045, or 4.5% The retention ratio is 1.40= .60. Sustainable growth is thus .045(60)/[1- .045(.60)] = .0277, or 2.77%