Big Deal,Inc.wants to grow 30% next year.If it maintains its 40% dividend payout ratio,liabilities to equity ratio of 1,and total asset turnover of 2,what must its profit margin be to achieve this growth?

Question

Quizplus · Accepted Answer

To achieve a 30% growth rate, the sustainable growth rate formula is used: SGR = ROE * (1 - dividend payout ratio). Given liabilities to equity ratio of 1, equity multiplier is 2. Total asset turnover is 2, so ROE = Profit Margin * Total Asset Turnover * Equity Multiplier. Solving for Profit Margin gives 9.6%.