Question

Ramble On Co. wishes to maintain a growth rate of 11 percent per year, a debt-equity ratio of 1.3, and a dividend payout ratio of 35 percent. The ratio of total assets to sales is constant at .85.

What profit margin must the firm achieve? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

maximum sales growth ____%

Answer 1

Sustainable growth rate, g=ROE*(1- dividend payout ratio)

0.11= ROE*(1-0.35)

ROE= 0.11/0.65

Therefore, ROE is 0.1692.

Dupont ratio=Profit margin*Total assets turnover*Financial leverage

Dupont ratio= Net income/Net sales*Net sales/Average total assets*Total Assets/total equity

Ratio of total sales/ total assets = 1/ assets to sales

                                                              = 1/0.85= 1.1765

Ratio of total assets to total equity is obtained by converting debt to equity to assets to equity.

Assets/ Equity= 1+ Debt/Equity

                       = 1+ 1.3= 2.3

Profit margin:

ROE= Profit margin*Sales/ Assets* Assets/ Equity

0.1692= Profit margin*1.1765*2.3

0.1692= Profit margin*2.7060

Profit margin= 0.1692/2.7060 = 0.0625 6.25%.

Therefore, the firm must achieve a profit margin of 6.25%.