ROE = tax burden × interest burden × EBIT margin × asset turnover × financial leverage
tax burden = net income/EBT
EBT = EBIT - I = 2,000,000 - 900,000 = 1,100,000
net income = (EBT)(1-t) = (1,100,000)(1 - 0.35) = 715,000
tax burden = 715,000/1,100,000 = 0.65
interest burden = EBT/EBIT = 1,100,000/2,000,000 = 0.55
EBIT margin = EBIT/revenue = 2,000,000/16,000,000 = 0.125
asset turnover = revenue/total assets = 16,000,000/12,300,000 = 1.301
financial leverage = total assets/total equity = 12,300,000/7,000,000 = 1.757
ROE = 0.65 × 0.55 × 0.125 × 1.301 × 1.757 = 0.1021
Alternatively, ROE = [(EBIT - I)(1-t)]/equity = [(2,000,000 - 900,000)(1 - 0.35)]/7,000,000 = 0.1021
Sustainable growth = ROE (1 – dividend payout rate) = 0.1021 × 0.72 = 7.35%.
