Question

You are given the following information for Hendrix Guitars, Inc. Profit margin Total asset turnover Total debt ratio Payout ratio 6.0% 1.8 41 20% Calculate the sustainable growth rate. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Sustainable growth rate %

Answer 1

Debt ratio=debt/Total assets

debt=0.41*Total assets

Total assets=debt+equity

equity=Total assets-0.41*Total assets

=0.59*Total assets

Equity multiplier=Total assets/Equity

=Total assets/(0.59*Total assets)

=1.69491525

ROE=Profit margin*Total asset turnover*Equity multiplier

=6*1.8*1.69491525=18.3050847%

Retention ratio=1-payout ratio

=1-0.2=0.8

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

=(0.183050847*0.8)/[1-(0.183050847*0.8)]

=17.16%(Approx).