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).