Question

Southern Lights Co. reported the following:Profit margin = 8.4 % Capital intensity ratio =0.45Debt-equity ratio = 0.60Net income = $95,000Dividends = $ 40,000Based 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.)

Answer 1

36.97%

Step-by-step explanation:

The sustainable growth rate (g) can be estimated using the equation below:

g = ROE*R/(1-ROE*R)

Where:

ROE = profit margin*total asset turn over*equity multiplier.

total asset turn over = 1/capital intensity ratio = 1/0.45 = 2.222

profit margin = 0.084

debit-equity ratio = 1 - (1/equity multiplier)

0.6 = 1 - (1/equity multiplier)

1/equity multiplier = 1-0.6 = 0.4

equity multiplier = 1/0.4 = 2.5

ROE = profit margin * total asset turn over * equity multiplier = 0.084*2.22*2.5 = 0.4662

R = 1 - (dividend/net income) = 1 - (40000/95000) = 1 - 0.42 = 0.5789

Therefore,

g = ROE*R/(1-ROE*R) = 0.4662*0.5789/(1-0.4662*0.5789) = 0.2699/(1-0.2699) = 0.2699/0.7301 = 0.3697 or 36.97%