Abacus Co. wishes to maintain a growth rate of 14 percent a year, a debt–equity ratio...

Abacus Co. wishes to maintain a growth rate of 14 percent a year, a debt–equity ratio of 1.4, and a dividend payout ratio of 26 percent. The ratio of total assets to sales is constant at 0.8.

What profit margin must the firm achieve? (in %) (round 2 decimal places)

Solutions

Expert Solution

Retention ratio = 1 - 0.26 = 0.74

Sustainable growth rate = (ROE × b) / [1 – (ROE × b)]

0.14 = [ROE(0.74)] / [1 – ROE(0.74)]

ROE = 0.165955 or 16.5955%

ROE = PM(TAT)(EM)

0.165955 = PM(1 / 0.8)(1 + 1.4)

PM = (0.165955) / [(1 / 0.8)(2.4)]

PM = 0.0553 OR 5.53%

jeff jeffy answered 1 year ago

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