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CA Final · Advanced Financial Management · Financial Policy and Corporate Strategy

Vihaan Ltd has a sustainable growth framework: net profit margin 8%, asset turnover 1.5 times, equity multiplier (total assets/equity) 2, and a dividend payout of 40%. Using ROE x retention ratio, what is the sustainable growth rate, assuming the ratios stay constant and no fresh equity is issued?

The sustainable growth rate is 14.40%. ROE equals 8% x 1.5 x 2, which is 24%, and retention is 60%, so growth equals 24% multiplied by 0.60. Using the payout ratio instead of retention would wrongly give 9.6%.

  1. A14.40%Correct
  2. B24.00%
  3. C10.91%
  4. D9.60%

Explanation

ROE = 8% x 1.5 x 2 = 24%. Retention = 1 - 0.40 = 0.60. Using g = ROE x b, g = 24% x 0.6 = 14.4%. Option 24% ignores retention; 9.6% wrongly uses the payout ratio (24% x 0.4).

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