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You are given the following information for Clapton Guitars, Inc.   Profit margin 10%  Total asset turnover   1.4   Total debt...

You are given the following information for Clapton Guitars, Inc.

  Profit margin 10%  Total asset turnover   1.4   Total debt ratio 0.49   Payout ratio 36%

Calculate the sustainable growth rate (in %). (round 4 decimal places)

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Answer #1

Equity Ratio = 1 - Debt Ratio
Equity Ratio = 1 - 0.49
Equity Ratio = 0.51

Return on Equity, ROE = Profit Margin * Total Asset Turnover * (1 / Equity Ratio)
Return on Equity, ROE = 10.00% * 1.40 * (1 / 0.51)
Return on Equity, ROE = 27.4510%

Retention Ratio, b = 1 - Payout Ratio
Retention Ratio, b = 1 - 0.36
Retention Ratio, b = 0.64

Sustainable Growth Rate = [ROE * b] / [1 - ROE * b]
Sustainable Growth Rate = [0.274510 * 0.64] / [1 - 0.274510 * 0.64]
Sustainable Growth Rate = 0.175686 / 0.824314
Sustainable Growth Rate = 0.213130 or 21.3130%

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