alculate the sustainable growth rate
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You are given the following information on Kaleb's Heavy Equipment: |
| Profit margin | 6.3 | % | ||
| Capital intensity ratio | .72 | |||
| Debt-equity ratio | .8 | |||
| Net income | $ | 74,000 | ||
| Dividends | $ | 15,600 | ||
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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:-
Sustainable growth rate = 14.05 %
Explanation:-
Total asset turnover = 1 / Capital intensity ratio = 1 / 0.72
Equity multiplier = 1 + Debt–equity ratio = 1 + 0.80
Return on equity (ROE) = Profit margin * Total asset turnover * Equity multiplier
= (0.063) * (1 / 0.72) * (1 + 0.80)
= (0.063) * (1.39) * (1.80)
= 0.1576 or 15.76 %
The plow-back ratio is one minus the dividend payout ratio, so:
Plow-back ratio (b) = 1 - ($15,600 / $74,000)
Plow-back ratio (b) = 1- 0.218
Plow-back ratio (b) = 0.782
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