MoMoney Co.wants to increase its sustainable growth rate to 10%.If it maintains its 15% profit margin,25% retention ratio,and 0.25 liabilities to equity ratio,what must its total asset turnover value be?

Question

Quizplus · Accepted Answer

The sustainable growth rate formula is:

Sustainable Growth Rate = Profit Margin x Retention Ratio x Total Asset Turnover x (1 - Debt-to-Equity Ratio)

We are given Profit Margin = 15%, Retention Ratio = 25%, Debt-to-Equity Ratio = 0.25, and we want to increase the Sustainable Growth Rate to 10%.

So, we can rearrange the formula for Total Asset Turnover as follows:

Total Asset Turnover = Sustainable Growth Rate / (Profit Margin x Retention Ratio x (1 - Debt-to-Equity Ratio))

Plugging in the values, we get:

Total Asset Turnover = 10% / (15% x 25% x (1 - 0.25)) = 1.94

Therefore, the answer is C).