Ramble On Co. wishes to maintain a growth rate of 9 percent ayear, a debt-equity...

Ramble On Co. wishes to maintain a growth rate of 9 percent a year, a debt-equity ratio of 0.49, and a dividend payout ratio of 56 percent. The ratio of total assets to sales is constant at 1.25. What profit margin must the firm achieve?

Expert Solution

- Return on Equity(ROE) = Growth rate/(1- Dividend payout Ratio)

ROE = 9%/(1-0.56)

ROE = 20.45%

- Equity Multiplier = 1+ Debt-Equity ratio = 1 + 0.49

Equity Multiplier = 1.49

- Asset turnover ratio = 1/Total assets to sales = 1/1.25 = 0.8

As per DuPont Analysis:-

ROE = Net profit margin*Asset turnover ratio*Equity Multiplier

20.45% = Net profit margin*0.8*1.49

Net profit margin= 17.16%

jeff jeffy answered 2 years ago

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Ramble On Co. wishes to maintain a growth rate of 9 percent ayear, a debt-equity...

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