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    meeechie's Avatar
    meeechie Posts: 2, Reputation: 1
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    #1

    Aug 17, 2011, 03:25 PM
    How to calculate sustainable growth?
    How to calculate sustainable growth with:

    Profit margin 8.2%
    Capital intensity ratio .75
    Debt equity ratio .40
    Net income $43,000
    Dividends $12,000
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
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    #2

    Aug 18, 2011, 05:31 AM
    The sustainable growth rate (let's call it g*, following common practice) is the result of multiplying two factors: Return on Equity (ROE, which is the ratio Net Income / Equity) and the firm's retention rate (or plowback rate, which is 1 - the payout rate) We'll call that latter factor R.

    So g* = ROE x R

    You have in your given data all the ingredients needed for this cocktail. Especially when you note that ROE is itself the result of multiplying three factors:

    Profit margin (the ratio Net Income / Sales)
    Asset turnover (Sales / Assets)
    Capitalization (Assets / Equity)

    One final clue, then back to you to solve: The Capital Intensity ratio is just the reciprocal of the Asset Turnover ratio.
    meeechie's Avatar
    meeechie Posts: 2, Reputation: 1
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    #3

    Aug 18, 2011, 03:18 PM
    Thank you! Extremely helpful
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
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    #4

    Aug 19, 2011, 04:35 AM
    Glad it helped, M. Best of luck with your studies.
    msmisty's Avatar
    msmisty Posts: 3, Reputation: 1
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    #5

    Sep 14, 2011, 01:53 PM
    Can u show me calculations for this promblem
    Thank u
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