Question

# Consider the following information for Kaleb's Kickboxing:   Profit margin 9.9%   Capital intensity ratio 0.55       Debt–equity...

 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?

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).