Question

Sustainable Growth [LO3] Based on the following information, calculate the sustainable growth rate for Kaleb’s Heavy Equipment:

Profit margin

=

7.3

%

Capital intensity ratio

=

.80

Debt

−

equity ratio

=

.95

Net income

=

$73

,

000

Dividends

=

$24000

Answer 1

Formula to calculate sustainable growth rate
Sustainable growth rate = (ROE*Retention ratio)/(1-(ROE*Retention ratio))
Calculation of return on equity
Return on equity = Profit margin*Total asset turnover*Equity multiplier
Return on equity = 7.3%*(1/0.80)*(1+0.95)
Return on equity		17.79%
Calculation of retention ratio = (1-Dividend payout ratio)
Calculation of retention ratio = (1-(24000/73000))
Calculation of retention ratio			67.12%
Calculation of sustainable growth rate
Sustainable growth rate = (17.79%*67.12%)/(1-(17.79%*67.12%))
Sustainable growth rate		13.56%
The sustainable growth rate of the company is 13.56%