Question

You are given the following information on Kaleb's Welding Supply:

Profit margin 6.7 %

Capital intensity ratio .76

Debt–equity ratio .9

Net income $ 82,000

Dividends $ 16,400

Calculate the sustainable growth rate.

Answer #1

**The sustainable growth rate is computed as shown
below:**

**= ( ROE x b ) / ( 1 - ( ROE x b) )**

**ROE is computed as follows:**

**= Profit margin x 1 / capital intensity ratio x (1 +
debt equity ratio )**

= 0.067 x 1 / 0.76 x 1.9

**= 16.75% or 0.1675**

**b is computed as follows:**

**= 1 - dividend / Net income**

= 1 - $ 16,400 / $ 82,000

**= 0.80**

**So, the sustainable growth rate will be as
follows:**

= ( 0.1675 x 0.80 ) / ( 1 - ( 0.1675 x 0.80 )

= 0.134 / 0.866

**= 15.47% Approximately**

Feel free to ask in case of any query relating to this question

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