Question

Sustainable Growth Rate You have located the following information on Rock Company: debt ratio = 44.5%, capital intensity ratio = 2.43 times, profit margin = 17%, and dividend payout ratio = 34%. What is the sustainable growth rate for Rock? (Do not round intermediate steps.)

Answer 1

debt ratio=debt/total assets

Hence debt=0.445total assets

Total assets=debt+equity

Hence equity=(1-0.445)total assets=0.555total assets

capital intensity ratio=total assets/sales

Hence total assets=2.43sales

Profit margin=Net income/Sales

Hence net income=0.17sales

ROE=net income/total equity

=0.17sales/0.555total assets

=0.17sales/(0.555*2.43sales)

=0.126051977

Retention ratio=1-payout

=(1-0.34)=0.66

SGR=(ROE*Retention ratio)/[1-(ROE*Retention ratio)]

=(0.126051977*0.66)/[1-(0.126051977*0.66)]

which is equal to

=9.07%(Approx).