Regarding Financial Statement Analysis, Pg 329, Q6 of Schweser L1 2008… Would the depth required to answer this question be typical of Level 1? It looks easy at a glance but the answer contains a combination of about 7 formulae! …or is there an easier way to get the answer?! Also, does anyone have any further information on “Equity Multiplier”? Famous Inc Fin. Statements: Sales: 800,000 Net Profit Margin: 20% Sales to Assets: 50% Equity Multiplier: 1.6 Int. Expense: 30,000 Div’s Declared: 32,000 What is the sustainable growth rate closest to? a. 3.2 b. 8.0 c. 16.0 d. 12.8

This is very indicative to a Level I exam question. sustained growth rate = ROE * RR ROE = NI/TE = NI/Sales * Sales/Assets * Assets/TE plug and chug, you’ll have to familiarize yourself with terms as well (eg Assets/TE is also called the Equity Multiplier) ROE = 0.20 * 0.50 * 1.6 = 0.16 RR = 1 - div payout ratio = 1 - 0.20 = 0.80 therefore sustained growth rate = 0.16 * 0.80 = 0.128 or 12.8% choice (d)

sorry, i was quick to answer the question but realized without further explanation someone struggling with the question might not find the answer above helpful, at least without a few additional details ROE = return on equity RR = earnings retention rate NI = net income = sales * net profit margin TE = total equity div payout ratio = div payment/ NI = 32,000/ (20% * 800,000) hope this helps

Char-Lee explained it correctly; the answer is (d). I would suggest knowing the DuPont analysis by heart, at least the 3 factor model.

For reference 3 Factor model: ROE = NI / CE = NI/NS * NS/TA * TA/CE = Net Profit Margin * Total Asset Turnover * Financial Leverage NS = Net Sales, TA=Total Assets, CE = Common Equity T=Tax Rate, EBIT=Earnings before Interest and taxes 5 Factor (Extended Model) NI / TA * TA / CE = (EBIT - Int )(1-T)/TA * TA / CE = (EBIT/TA - Int / TA) * (1-T) * TA / CE = [(EBIT/NS * NS / TA) - Int/TA] * TA/CE * (1-T) = [(Operating Profit Margin * Total Asset Turnover) - Interest Expense Ratio] * Financial Leverage * Tax Retention Hope this helps CP

i’d suggest using 3 factor model if possible because it’s faster (by the way EquityMultiplier is the same as FinancialLeverage) ROE = ProfitMargin*AssetTurnover*EquityMultiplier = 0.2*0.5*1.6 = 16% RR = (NetProfit - DivPaid)/NetProfit = (0.2*800 - 32)/(0.2*800) = 0.8 g = ROE*RR = 16%*0.8 = 12.8% -> D

That’s great, thanks for you help everyone!