Question

# Consider the following information for Kaleb's Kickboxing:   Profit margin 8%   Capital intensity ratio 0.59       Debt–equity...

 Consider the following information for Kaleb's Kickboxing:
 Profit margin 8% Capital intensity ratio 0.59 Debt–equity ratio 0.59 Net income \$23,000 Dividends \$15,640
 Required:
 Calculate the sustainable growth rate? (Do not round your intermediate calculations.)

Sustainable Growth Rate = ROE * (1 - Dividend Payout Ratio)

Profit margin = Net Income/Sales

=> Sales = \$23,000/8% = \$287,500

Capital Intensity Ratio = Assets/Sales

Assets = 0.59 * 287,500 = \$169,625

Debt/Equity Ratio = 0.59

Debt/(Debt + Equity) = 0.59/(0.59 + 1) = 37.11%

Equity/(Equity+Debt) = 1-37.11% = 62.89%

Now, remeber based on accountancy principles, assets = equity + debt

=> Equity = 62.89% * 169,625 = 106,682.39

Dividend Payout Ratio = Dividends/Net Income = 15640/23000 = 68%

ROE = 23,000/106,682.39 = 21.56%

Hence, sustainable growth rate = 21.56% * (1 - 68%) = 6.89%