Question

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.)

Answer 1

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%