Question

You are given the following information on Kaleb's Heavy Equipment: Profit margin 6.6 % Capital intensity ratio .75 Debt-equity ratio .9 Net income $ 80,000 Dividends $ 16,200 Calculate the sustainable growth rate.

Answer 1

.15343

Step-by-step explanation:

Calculation to determine the sustainable growth rate

First step is to calculate the Asset turnover ratio using this formula

Asset turnover ratio = (1 /CIR)

Let plug in the formula

Asset turnover ratio= (1 /.75)

Asset turnover ratio= 1.33

Second step is to calculate the Equity Multiplier using this formula

Equity Multiplier = (1+Debt equity ratio)

Let plug in the formula

Equity Multiplier=1+.9

Equity Multiplier= 1.9

Third step is to calculate Return on Equity ROE using this formula

Return on Equity ROE = (PM * AT * EM)

Let plug in the formula

Return on Equity ROE= (.066 * 1.33 * 1.9)

Return on Equity ROE= 0.166782

Fourth step is to calculate Payout Ratio

Payout Ratio=(16200/80,000)

Payout Ratio = 20.25%

Fifth step is to calculate Plowback Ratio using this formula

Plowback Ratio= ( 1 – payout)

Let plug in the formula

Plowback Ratio =1-20.25%

Plowback Ratio= 79.75%

Sixth step is to calculate Return on Equity ROE

Return on Equity ROE=(net Income/Equity)

Return on Equity ROE = 16.68%

Now let calculate the sustainable Growth Rate using this formula

Sustainable Growth Rate = (ROE * plowback) / (1 – ROE * Plowback)

Let plug in the formula

Sustainable Growth Rate= (.133023)/(.866977)

Sustainable Growth Rate= .15343

Therefore Sustainable Growth Rate is .15343