Fixed Appliance Co.wishes to maintain a growth rate of 8 percent a year,a constant debt-equity ratio of 0.42,and a dividend payout ratio of 50 percent.The ratio of total assets to sales is constant at 1.3.What profit margin must the firm achieve?
A)12.92 percent
B)13.46 percent
C)13.56 percent
D)14.33 percent
E)14.74 percent

Question

Quizplus · Accepted Answer

Retention ratio = 1 - 0.50 = 0.50Sustainable growth rate = 0.08 = (ROE × 0.50)/[1 - (ROE × 0.50)]; ROE = 0.14815Return on equity = 0.14815 = PM × (1/1.3) × (1 + 0.42); Profit margin = 13.56 percent