Question

Consider the following information for Kaleb's Kickboxing: |

Profit margin | 9.9% |

Capital intensity ratio | 0.55 |

Debt–equity ratio | 0.58 |

Net income | $29,000 |

Dividends | $20,300 |

Required: |

Calculate the sustainable growth rate? |

Answer #1

Profit margin=Net income/Sales

Hence Sales=(29000/0.099)=$292,929.2929

Capital intensity ratio=Total assets/Sales

Hence Total
assets=(292,929.2929*0.55)=$161,111.1111(Approx)

Debt-equity ratio=Debt/equity

Hence debt=0.58equity

Let equity be $x

Debt=$0.58x

Total assets=debt+equity

=$1.58x

161,111.1111=1.58x

Hence x=161,111.1111/1.58

Hence equity=$101,969.0577

ROE=Net income/Total equity

=(29000/101,969.0577)

=28.44%

Dividend payout ratio=Dividends/Net income

=(20300/29000)

=0.7

Hence retention ratio=1-Dividend payout ratio

=(1-0.7)

=0.3

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

=(0.3*0.2844)/[1-(0.3*0.2844)]

= **9.33%(Approx).**

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