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12 July, 09:02

You are given the following information on Kaleb's Heavy Equipment: Profit margin 6 % Capital intensity ratio. 69 Debt-equity ratio. 8 Net income $ 68,000 Dividends $ 15,000 Calculate the sustainable growth rate.

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  1. 12 July, 09:10
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    Sustainable growth rate is 13.89%

    Explanation:

    We need to find ROE in order to compute the sustainable growth:

    The total asset turnover is inverse of the ratio of capital intensity and the equity multiplier which is 1 + D / E, Using this relationship, we get:

    ROE = PM * TAT * EM

    where

    ROE is Return on equity

    PM is Profit Margin

    TAT is capital intensity ratio

    EM is Equity multiplier

    Putting the values:

    ROE = 6% * (1/.69) * (1 + 0.80)

    ROE = 15.65%

    The plowback ratio (b) is as:

    b = 1 - (Dividends / Net Income)

    b = 1 - ($15,000 / $68,000)

    b = 0.7794

    The sustainable growth rate is computed as:

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

    = [0.1565 (0.7794) ] / [1 - 0.1565 (0.7794) ]

    = 13.89%
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