Based on the following information, calculate the sustainable growth rate for Jovial Watches: Profit margin: 11.2% Capital intensity ratio:. 55 Debt-equity ratio: 40 Net income: $34,000 Dividends: $15,000

1

ROE = (Profit margin)(Total asset turnover)(Equity multiplier)

ROE = (0.112)(1/0.55)(1+0.40)    [ Since Capital intensity ratio = 1 ÷ Asset Turnover]

ROE = 0.28509 or 28.519%

2

Plowback ratio = 1 – [ Dividend paid / Net Income ] = 1 – [15000/34000] = 0.5588

3

Sustainable growth rate = [(ROE)(b)] / [1 – (ROE)(b)]

Sustainable growth rate = [ 0.2851 (0.5588) ] / [ 1 – 0.2851 (0.5588)]

Sustainable growth rate = 0.1895 or 18.95 %