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Ramble On Co. wishes to maintain a growth rate of 10 percent a year, a debt-equity...

Ramble On Co. wishes to maintain a growth rate of 10 percent a year, a debt-equity ratio of 0.35, and a dividend payout ratio of 62 percent. The ratio of total assets to sales is constant at 1.33. What profit margin must the firm achieve?

A. 13.42%

B. 14.55%

C. 23.82%

D. 23.57%

E. 8.17%

Solutions

Expert Solution

Retention ratio = 1- payout ratio
=1-0.62
=0.38
Growth rate = ROE * retention ratio
0.10 =ROE *0.38
ROE =26.316%
Debt equity = 0.35
Therefore asset multiplier woul be = 1.35/1
=1.35
Return On Equity (ROE) = Profit margin* Asset turnover * Financial Leverage
0.26316=profit margin*1.33*1.35
Profit margin = 14.55%
Correct Answer =B. 14.55%

jeff jeffy answered 3 years ago
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