Question

Sustainable Growth Rate You have located the following information on Rock Company: debt ratio = 48%, capital intensity ratio = 2.57 times, profit margin-24%, and dividend payout ratio 41%, what is the sustainable growth rate for Rock? (Do not round intermediate steps.)

Answer 1

sustainable growth rate = return of equity*(1-dividend payout ratio)

return on equity = net profit margin * total assets turnover ratio * financial leverage

= (net profit margin) * (1/capital intensity ratio) * (1/(1-debt ratio))

= 24% * (1/2.57) * (1/52%) = 0.1795 = 17.95%

SGR = return of equity*(1-dividend payout ratio)= 17.95% * (1-41%) = 10.59%