Question

You are given the following information on Kaleb's Heavy Equipment:

Profit margin			5.1	%
Capital intensity ratio			.60
Debt-equity ratio			.6
Net income		$	50,000
Dividends		$	13,200

Calculate the sustainable growth rate. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Substantial growth rate = 11.12%

Explanation:

Step 1) Computation of plowback ratio

Dividends = $13,200

Net Income = $50,000

Plowback ratio (b) = 1 - (Dividend / Net Income)

Plowback ratio (b) = 1 - ($13,200 / $50,000)

Plowback ratio (b) = 0.736

.

Step 2: Computation of Return on Equity.

Profit Margin = 5.10%

Capital Intensity ratio = 0.60

Debt equity ratio = 0.6

Asset turnover ratio = 1 / capital intensity ratio = 1 / 0.60 = 1.666667

Equity multiplier = 1 + Debt equity ratio = 1 + 0.6 = 1.60

Return on Equity = Profit Margin * Total Assets Turnover * Equity multiplier

Return on Equity = 0.0510 * 1.666667 * 1.60 = 0.136 or 13.60%

Return on Equity = 13.60%.

.

Computation of substantial growth rate.

Substantial growth rate = (ROE * b) / [1 - (ROE * b)]

Substantial growth rate = (0.136 * 0.736) / [1 - (0.136 * 0.736)]

Substantial growth rate = 0.100096 / [1 - 0.100096] = 0.100096 / 0.899904

Substantial growth rate = 0.1112 or

Substantial growth rate = 11.12%