Problem 4-14 Sustainable Growth [LO3) You are given the following information on Kaleb's Heavy Equipment 5,6%...

Question

Question

Problem 4-14 Sustainable Growth [LO3) You are given the following information on Kalebs Heavy Equipment 5,6% 65 Profit margi

Answer 1

Answer #1

Answer Sustainable growth rate = 12.59 %

Explanation:

Total asset turnover = 1 / Capital intensity ratio = 1 / 0.65

Equity multiplier = 1 + Debt–equity ratio = 1 + 0.70

Return on equity (ROE) = Profit margin * Total asset turnover * Equity multiplier

= (0.056) * ( 1 / 0.65 ) * (1 + 0.70)

= 0.1465 or 14.65 %

Plowback ratio (b) = 1 - ($14,200 / $60,000) = 0.7633

Sustainable growth rate = (ROE * b) / [1 - (ROE * b)]

= (0.1465 * 0.7633) / [ 1 - (0.1465 * 0.7633)]

= 0.11182345 / 0.88817655

= 0.1259 = 12.59 %

Answer 2

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