Question

Profit margin = 9.4 % Capital intensity ratio = .55 Debt-equity ratio = .70 Net income = $ 105,000 Dividends = $ 40,000 Based on the above information, calculate the sustainable growth rate for Northern Lights Co. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

ROE = (Profit margin)(Total asset turnover)(Equity multiplier)

ROE = (.094)(1/.55)(1 + .70)

ROE = .2905, or 29.05%

Plowback ratio = 1 – ($40,000 / $105,000) = .62

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

Sustainable growth rate = [.2905(.62)] / [1 – .2905(.62)]

Sustainable growth rate = .2193, or 21.93%