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Rock Company Case Summary

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Rock Company Profit margin = 13% Capital intensity ratio = 2.35 times Debt ratio = 42.5% Dividend payout ratio = 30% First let calculate ROE; ROE = profit margin x total asset turnover x equity multiplier Total asset turnover = 1/ Capital intensity ratio =1/ 2.35 = 0.42553 Equity multiplier = 1/ (1-debt ratio) = 1/(1-0.425) = 1.73913 ROE = 0.13 X 0.42553 X 1.73913 = 0.09621. Sustainable growth rate for Rock Company; Sustainable growth rate = ROE x RR/ [1 – (ROE x RR)] RR = 1 – Dividend payout ratio = 1-0.30 = 0.70 Sustainable growth rate = (0.09621 x 0.70)/ [1 – (0.09621x

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