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.

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%