Profit margin = 9.4 % Capital intensity ratio = 0.55 Debt-equity ratio = 0.70 Net income = $ 105,000 Dividends = $ 40,000 Based on the information, calculate the sustainable growth rate for Northern Lights Co. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

Question

Business

Marlene Coffey

17 October, 15:31

Profit margin = 9.4 % Capital intensity ratio = 0.55 Debt-equity ratio = 0.70 Net income = $ 105,000 Dividends = $ 40,000 Based on the information, calculate the sustainable growth rate for Northern Lights Co. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

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Paisley · Answer 1

The sustainable growth rate for Northern Lights Co. is 33%

Explanation:

Profit margin = 9.4 %

Capital intensity ratio = 0.55

Debt-equity ratio = 0.70

Net income = $ 105,000

Dividends = $ 40,000

Revenue = Net income / profit margin = 105,000 / 9.4% = $1,117,021

Capital intensity ratio = Total Assets / Total revenue

Total Assets = Capital intensity ratio x Total revenue = 0.55 x $1,117,021

Total Assets = $614,362

Asset turnover ratio = Revenue / Total Assets = $1,117,021 / $614,362 = 1.82

Debt to equity ratio = debt / equity

Equity = Debt / debt to equity ratio

1 = Debt / 0.7

Debt = 0.7

Asset = Equity + Debt = 1 + 0.7 = 1.7

Equity multiplier is = 1.7

Retention rate = 1 - payout ratio = 1 - 40,000/105,000 = 1 - 0.38 = 0.62

ROE = profit margin * total asset turnover ratio * equity multiplier

ROE = 9.4% x 1.82 x 1.7

ROE = 0.291

ROE = 29.1%

Sustainable Growth rate = Retention Rate - Return on equity

Sustainable Growth rate = 0.62 - 0.291 = 0.329 = 32.9% = 33%