Question

Profit margin	=		10.3	%
Capital intensity ratio	=		.64
Debt−equity ratio	=		.79
Net income	=	$	114,000
Dividends	=	$	53,500

Based on the above information, calculate the sustainable growth rate for Southern Lights Co. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Sustainable growth rate             %

Answer 1

Profit margin=net income/sales

Hence sales=(114000/0.103)=$1,106,796.117

Capital intensity ratio=total assets/sales

Hence total assets=$1,106,796.117*0.64

=$708349.5146(Approx)

Debt−equity ratio=debt/equity

Hence debt=0.79equity

Total assets=debt+equity

$708349.5146=0.79equity+equity

Hence equity=$708349.5146/(0.79+1)

=$395725.9858

Dividend payout ratio=Dividend/Net income

=(53500/114000)=0.469298245

Retention ratio=1-payout ratio

=1-0.469298245

=0.530701755

ROE=net income/equity

=(114000/$395725.9858)

=0.2880778125

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

=(0.2880778125*0.530701755)/[1-(0.2880778125*0.530701755)]

=18.05%(Approx).