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3 years ago

Bases on the following information calculate the sustainable growth rate for Southern Light.

Business

1 answer:

Anarel [89]3 years ago

3 0

Answer:

20.91%

Explanation:

The following values is the details of a report gotten from Southern Light

Profit margin= 8.4%

Capital intensity ratio= 0.45

Debt to equity ratio= 0.60

Net income= $95,000

Dividend= $40,000

The first step is to calculate the return on equity

ROE= Profit margin×Total assets turnover×equity multiplier

= 8.4/100×1/0.45×(1+0.60)

= 0.084×2.222×1.6

= 0.2987×100

= 29.87%

The next step is to calculate the Plowback ratio

Plowback ratio= 1-(dividend/net income)

= 1-($40,000/$95,000)

= 1-0.421

= 0.579

Therefore, the sustainable growth rate can be calculated as follows

= ROE×Plowback ratio/1-ROE(Plowback ratio)

= 0.2987×0.579/1-0.2987(0.579)

= 0.17295/1-0.17295

= 0.17295/0.8271

= 0.2091×100

= 20.91%

Hence the sustainable growth rate for southern light is 20.91%

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