You have located the following information on Webb’s Heating & Air Conditioning: debt ratio is 56 percent, capital intensity is 1.30 times, profit margin is 12.7 percent, and the dividend payout is 27.00 percent Calculate the sustainable growth rate for Webb. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Solution Asset turnover ratio = 1/Capital intensity ratio = 1/1.3 = 0.77 Equity multiplier = 1+Debt equity ratio = 1+0.56/0.44 = 2.27 ROE = Profit margin×Assets turnover×Equity multiplier = 0.127×0.77×2.27 = 0.222028 Retention ratio = 1-Payout ratio = 1-0.27 = 0.73 Sustainable growth rate: = ROE×Retention ratio÷(1-ROE×Retention ratio) = 0.222028×0.73÷(1-0.222028×0.73) = 19.34% .

1. You have located the following information on Webb’s Heating & Air Conditioning: debt
ratio is 56 percent, capital intensity is 1.30 times, profit margin is 12.7 percent, and the dividend
payout is 27.00 percent
Calculate the sustainable growth rate for Webb. (Do not round intermediate calculations and
round your final answer to 2 decimal places.)
You have located the following information on Webb’s Heating & Air Conditioning: debt
ratio is 56 percent, capital intensity is 1.30 times, profit margin is 12.7 percent, and the dividend
payout is 27.00 percent
Solution
Asset turnover ratio
= 1/Capital intensity ratio
= 1/1.3
= 0.77
Equity multiplier
= 1+Debt equity ratio
= 1+0.56/0.44
= 2.27
ROE = Profit margin×Assets turnover×Equity multiplier
= 0.127×0.77×2.27
= 0.222028

2. Retention ratio
= 1-Payout ratio
= 1-0.27
= 0.73
Sustainable growth rate:
= ROE×Retention ratio÷(1-ROE×Retention ratio)
= 0.222028×0.73÷(1-0.222028×0.73)
= 19.34%