Fix-It Co. wishes to maintain a growth rate of 9.89 percent a year, a constant debt-equity ratio of .42, and a dividend payout ratio of 40 percent. The ratio of total assets to sales is constant at 1.3. What profit margin must the firm achieve?

Question

Quizplus · Accepted Answer

The sustainable growth rate formula is: g = (ROE) * (1 - payout ratio). ROE can be expressed as (Profit Margin) * (Asset Turnover) * (Equity Multiplier). Given the debt-equity ratio, the equity multiplier is 1 + 0.42 = 1.42. Asset turnover is 1/1.3. Solving for the profit margin using the given growth rate and payout ratio, the correct profit margin is approximately 13.73 percent.

Fix-It Co Wishes to Maintain a Growth Rate of 9