Nobility Homes, Incorporated, is a small maker of manufactured homes sold throughout the state of Florida. The following are selected financial data for the company for the period 2012-2016.
| 2012 | 2013 | 2014 | 2015 | 2016 | |
| Profit margin (%) | 0.3 | 4.0 | 5.2 | 9.2 | 17.2 |
| Retention ratio (%) | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 |
| Asset turnover (X) | 0.42 | 0.47 | 0.52 | 0.57 | 0.62 |
| Financial leverage (X) | 1.07 | 1.11 | 1.14 | 1.19 | 1.27 |
| Growth rate in sales (%) | 17.2 | 16.7 | 14.2 | 30.7 | 22.2 |
Calculate Nobility Homes’ annual sustainable growth rate for the years 2012 through 2016.
Note: Round your answers to 1 decimal place.
To calculate Nobility Homes, Incorporated’s annual sustainable growth rate (SGR) for the years 2012 through 2016, we can use the Gordon Growth Model, also known as the Sustainable Growth Model. The formula for SGR is as follows:
SGR = (Profit Margin * Retention Ratio * Asset Turnover * Financial Leverage) / (1 – (Profit Margin * Retention Ratio))
Let’s calculate the SGR for each year:
2012:
Profit Margin = 0.3%
Retention Ratio = 100%
Asset Turnover = 0.42
Financial Leverage = 1.07
SGR = (0.003 * 1 * 0.42 * 1.07) / (1 – (0.003 * 1)) ≈ 0.12 or 12.0%
2013:
Profit Margin = 4.0%
Retention Ratio = 100%
Asset Turnover = 0.47
Financial Leverage = 1.11
SGR = (0.04 * 1 * 0.47 * 1.11) / (1 – (0.04 * 1)) ≈ 0.205 or 20.5%
2014:
Profit Margin = 5.2%
Retention Ratio = 100%
Asset Turnover = 0.52
Financial Leverage = 1.14
SGR = (0.052 * 1 * 0.52 * 1.14) / (1 – (0.052 * 1)) ≈ 0.249 or 24.9%
2015:
Profit Margin = 9.2%
Retention Ratio = 100%
Asset Turnover = 0.57
Financial Leverage = 1.19
SGR = (0.092 * 1 * 0.57 * 1.19) / (1 – (0.092 * 1)) ≈ 0.351 or 35.1%
2016:
Profit Margin = 17.2%
Retention Ratio = 100%
Asset Turnover = 0.62
Financial Leverage = 1.27
SGR = (0.172 * 1 * 0.62 * 1.27) / (1 – (0.172 * 1)) ≈ 0.625 or 62.5%
In summary, Nobility Homes, Incorporated’s annual sustainable growth rates for the years 2012 through 2016 are approximately as follows: 12.0% in 2012, 20.5% in 2013, 24.9% in 2014, 35.1% in 2015, and 62.5% in 2016. These percentages represent the company’s ability to grow while maintaining its current financial structure and profitability. It’s worth noting that the SGR can provide insights into a company’s growth potential under its existing financial and operational conditions.
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