A firm has a payout ratio of 40 percent and a sustainable growth rate of 8.5%. The capital intensity ratio is 1.1 and the debt-equity ratio is.5. What is the profit margin?

Question

Quizplus · Accepted Answer

The sustainable growth rate (SGR) formula is SGR = ROE * (1 - dividend payout ratio), where ROE can be expressed as Net Income / Equity. Given the debt-equity ratio (D/E) is 0.5, we can express Equity as a function of Debt (Equity = 2*Debt). The capital intensity ratio, which is the inverse of the asset turnover ratio, is given as 1.1, indicating that for every dollar of sales, the firm uses $1.1 in assets. The profit margin is Net Income / Sales. To find the profit margin, we rearrange the SGR formula to solve for ROE and then use the relationships between ROE, profit margin, and the capital intensity ratio to find the profit margin. Given the information, the profit margin calculates to approximately 9.6%.

A Firm Has a Payout Ratio of 40 Percent and a Sustainable