You are given the following information for Clapton Guitars, Inc.
|Total asset turnover||1.3|
|Total debt ratio||0.3|
Calculate the sustainable growth rate (in %) (round 4 decimal places)
First we will calculate the Return on assets (ROA) as per below:
Return on assets (ROA) = Profit margin * Total asset turnover
Putting the values in the above formula, we get,
Return on assets (ROA) = 9% * 1.3 = 11.7%
When total debt ratio (Debt / Total assets) is 0.3, so equity to total assets or equity ratio will be 0.7 (because if 30% of assets are financed by debt, then remaining 70% will be financed by equity).
Next, we will calculate Return on equity (ROE):
Return on equity (ROE) = Return on assets / Equity ratio
Return on equity (ROE) = 11.7% / 0.7 =16.7142857143
Now, we will calculate sustainable growth rate as per below:
Sustainable growth rate = Return on equity * (1 - payout ratio)
Sustainable growth rate = 16.7142857143% * (1 - 0.37)
Sustainable growth rate = 16.7142857143% * 0.63 =10.53%
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