Question

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

Profit margin		9	%
Total asset turnover		1.6
Total debt ratio		0.42
Payout ratio		35	%

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

Total debt ratio=Total debt/Total assets

Hence total debt=0.42Total assets

Total assets=debt+Total equity

Total equity=(1-0.42)Total assets

=0.58Total assets

Equity multiplier=Total assets/Total equity

=Total assets/0.58Total assets

=1.724137931

ROE=Profit margin*Total asset turnover*Equity multiplier

=(0.09*1.6*1.724137931)

=0.248275862

Retention ratio=1-payout ratio

=(1-0.35)=0.65

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

=(0.248275862*0.65)/[1-(0.248275862*0.65)]

=19.2434(Approx).