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. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

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%