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%
