Given the following information: profit margin = 10%; sales = $100; retention ratio = 40%; assets = $200; equity multiplier = 2.0. If the firm maintains a constant debt-equity ratio and no new equity is used, what is the maximum growth rate? (Assume a constant profit margin.)

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Quizplus · Accepted Answer

The maximum growth rate is calculated using the sustainable growth rate formula: ROE * retention ratio. ROE is calculated as (profit margin * sales/assets) * equity multiplier. Here, ROE = (0.10 * 100/200) * 2 = 0.10. Sustainable growth rate = 0.10 * 0.40 = 0.04 or 4.0%. The closest option is 4.17%.

Given the Following Information: Profit Margin = 10%; Sales =