You are given the following information on Kalebs Welding Su

You are given the following information on Kaleb\'s Welding Supply: Profit margin Capital intensity ratio Debt-equity ratio Net income Dividends 5.1% 60 $50,000 $13,200 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

Solution

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

                                   = Profit margin x (1/Capital intensity ratio) x (1+ debt-equity ratio)

                                   = 0.051 x (1/0.60) x (1+0.6)

                                   = 0.051 x 1.66666667 x 1.6 = 0.136 or 13.6 %

Dividend Payout Ratio = Dividends/Net income

                                 = $ 13,200/ $ 50,000 = 0.264

Plowback ratio, b = 1 - Dividend Payout Ratio

                          = 1 – 0.264 = 0.736

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

                              = (0.136 x 0.736)/ [1 - (0.136 x 0.736)]

                                  = 0.100096/ (1 - 0.100096)

                                  = 0.100096/0.899904

                                  = 0.11122964 or 11.12 %

Sustainable growth rate is 11.12 %