Answer:
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%
