Answer:
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%
