Question

You are given the following information for Hendrix Guitars, Inc. |

Profit margin | 6.7 | % | |

Total asset turnover | 1.7 | ||

Total debt ratio | .48 | ||

Payout ratio | 25 | % | |

Calculate the sustainable growth rate. |

Answer #1

Sustainable growth rate |
16.43% |
|||||||||

Working: | ||||||||||

a. | Suppose Asset is 100. | |||||||||

Sales | = | Assets x Asset turnover | ||||||||

= | 100 | x | 1.7 | |||||||

= | 170 | |||||||||

b. | Profit | = | Sales x profit margin | |||||||

= | 170 | x | 6.70% | |||||||

= | 11.39 | |||||||||

c. | Total debt ratio | = | Total Debt/Total Assets | |||||||

0.48 | = | Total Debt / 100 | ||||||||

or, | Total Debt | = | 48 | |||||||

d. | Total Asests | = | Total Debt + Total Equity | |||||||

100 | = | 48 + Total Equity | ||||||||

or, | Total Equity | = | 52 | |||||||

e. | Return on Equity | = | Net Profit / Equity | |||||||

= | 11.39 | / | 52 | |||||||

= | 21.90% | |||||||||

f. | Sustainable growth rate | = | Return on Equity x (1-Dividend payout ratio) | |||||||

= | 21.90% | x | (1-0.25) | |||||||

= | 16.43% |
|||||||||

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