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

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