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CMA Final · Strategic Financial Management · Fundamental Analysis and Technical Analysis

Sagar Foods Ltd reports a net profit margin of 8%, total asset turnover of 2.5 times and an equity multiplier of 1.6. Its dividend payout ratio is 40%. Using the DuPont framework, ROE and the sustainable growth rate (ROE x retention ratio) are respectively:

DuPont ROE is margin times asset turnover times equity multiplier: 8% x 2.5 x 1.6 = 32%. With a 40% payout, retention is 60%, so sustainable growth is 32% x 0.60 = 19.2%. Using payout instead of retention would wrongly give 12.8%.

  1. A32%; 12.8%
  2. B20%; 12%
  3. C32%; 19.2%Correct
  4. D12.8%; 19.2%

Explanation

ROE = 8% x 2.5 x 1.6 = 32%. Retention = 1 - 0.40 = 0.60. Growth = 32% x 0.60 = 19.2%. Using the payout of 40% instead of retention gives 12.8%, which is the wrong base.

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