Question

you have located the following information on rock company: debt ratio=40.5%, capital intensity ratio=2.27 times, profit margin=9% and dividend payout ratio= 26%. What is the sustainable growth rate for Rock?

Answer 1

Capital intensity ratio = 2.27

Total assets/Sales revenue = 2.27

Total Assets = 2.27*Sales

Debt Ratio = 40.5%

Debt/Assets = 40.5%

Equity = 2.27*Sales*(100-40.5)%

= 1.35065*Sales

Profit Margin = 9%

Net Profit/Sales = 9%

Return on Equity = Net Profit/Equity

= 9%/1.35065

= 6.663%

Sustainable growth rate = Return on Equity*Retention Ratio

= 6.663%*(1-26%)

= 4.93%