Question

You are given the following information on Kaleb's Kickboxing:

Profit margin 9%  

Capital intensity ratio 0.7

Debt–equity ratio    0.7  

Net income $97767   

Dividends $16405

Calculate the sustainable growth rate (in %).

(Enter your answer as a percentage, omit the "%" sign in your response, and round your answer to 4 decimal places. For example, 1.23456% should be entered as 1.2346)

Answer 1

Profit margin=Net income/Sales

Sales=(97767/0.09)=$1086300

Capital intensity ratio=Total assets/Sales

Total assets=(1086300*0.7)=$760410

Debt equity ratio=debt/equity

Hence debt=0.7equity

Total assets=debt+equity

760410=0.7equity+equity

Hence equity=760410/1.7

=447300

ROE=net income/equity

=(97767/447300)

=0.218571428

Retention ratio=1-dividend payout ratio

=1-(Dividend/Net income)

=1-(16405/97767)

=0.832203095

Sustainable growth rate=(ROE*Retention ratio)/[1-(ROE*Retention ratio)]

=(0.218571428*0.832203095)/[1-(0.218571428*0.832203095)]

which is equal to

=22.2338(Approx).