Gaston Grooming Inc.,has a sustainable growth rate of 17.28%.If the retention ratio is .60,the leverage ratio is 1.2 and the asset turnover ratio is 1.6,what was the firm's profit margin?

Question

Quizplus · Accepted Answer

We can use the formula for sustainable growth rate:

Sustainable Growth Rate = (Profit Margin x Retention Ratio x Asset Turnover Ratio) / (1 - (Profit Margin x Retention Ratio x Asset Turnover Ratio) x Leverage Ratio)

Plugging in the given values:

17.28% = (Profit Margin x 0.6 x 1.6) / (1 - (Profit Margin x 0.6 x 1.6) x 1.2)

Solving for Profit Margin, we get:

Profit Margin = 15.0%

Therefore, the best choice is A.