Question

You are given the following information on Kaleb's Heavy Equipment: Profit margin 6.5 % Capital intensity ratio .74 Debt-equity ratio .8 Net income $ 78,000 Dividends $ 16,000 Calculate the sustainable growth rate.

Answer 1

Answer: 14.36%

Explanation:

The sustainable growth rate will be calculated thus:

Firstly, we will calculate the return on equity(ROE) which will be:

= Profit margin × (1/Capital intensity ratio) × (1 + Debt equity ratio)

= 6.5% (1/0.74) × (1 + 0.8)

= 0.065 × 1.35 × 1.8

= 0.158

Then, we'll calculate the plowback ratio which will be:

= 1 - (16000/78000)

= 1 - 0.2051

= 0.7949

Therefore, the growth rate will be:

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

= (0.158 × 0.7949) / [1 - (0.158 × 0.7949)]

= 0.1256 / 0.8744

= 0.1436

= 14.36%

The sustainable growth rate is 14.36%