Question

ou are given the following information on Kaleb’s Heavy Equipment: Profit margin 7.3 % Capital intensity ratio .80 Debt-equity ratio .95 Net income $ 73,000 Dividends $ 24,000 Calculate the sustainable growth rate. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Profit margin=net income/sales

Hence sales=(73000/0.073)=$1,000,000

Capital intensity ratio=total assets/sales

Hence total assets=(1,000,000*0.8)=$800,000

Debt-equity ratio=debt/equity

Hence debt=0.95equity

Total assets=debt+equity

=0.95equity+equity

$800,000 =1.95equity

Hence equity=$800,000/1.95

=$410256.4103

Dividend payout ratio=Dividends/Net income

=(24000/73000)=0.328767123

Retention ratio=1-Dividend payout ratio

=1-0.328767123

=0.671232877

ROE=net income/equity

=(73000/$410256.4103)

=0.1779375

sustainable growth rate=(ROE*Retention ratio)/[1-(ROE*Retention ratio)]

=(0.1779375*0.671232877)/[1-(0.1779375*0.671232877)]

which is equal to

=13.56%(Approx).