Northwestern Lights Inc., has the following information: Profit margin = 7.25%, Capital intensity ratio = 0.55,...

Northwestern Lights Inc., has the following information: Profit margin = 7.25%, Capital intensity ratio = 0.55, Debt-equity ratio = 0.64, Net income = $99,000, Dividends = $40,000. Compute the sustainable growth rate for the company. Select one: a. 14.79% b. 13.79% c. 15.72% d. 15.79% e. 18.72%

Expert Solution

Answer: a.14.79%

Explanation:

Sutainable growth rate = (ROExr)/(1-(ROExr))

r refers retention ratio

ROE refers Return on equity

ROE = Profit Margin X Total asset turnover X Equity multiplier

ROE = Profit Margin X (1/Capital Intensity ratio) X (1+Debit equity ratio)

ROE = 0.0725 x (1/0.55)x(1+0.64)

ROE = 21.62%

Retention ratio (r) = (99,000-40,000)/99,000

Retention ratio (r) = 0.5960 or 59.60%

Sutainable growth rate = (0.2162x0.5960)/(1-(0.2162x0.5960))

Sutainable growth rate = 0.1479 or 14.79%

jeff jeffy answered 2 years ago

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