Rowan Company has a net profit margin of 8.3 percent, debt ratio of 50 percent,
ID: 2754526 • Letter: R
Question
Rowan Company has a net profit margin of 8.3 percent, debt ratio of 50 percent, total assets of $5,087,200, sales of $6,738,600, and a dividend payout ratio of 65 percent. The firm’s management desires a sustainable growth rate (SGR) of 12 percent but does not wish to change the company’s level of debt or its payout ratio. What will the firm’s new net profit margin have to be in order to achieve the desired growth rate? (Round intermediate calculation to 2 decimal places, e.g. 5.25 and final answer to 1 decimal place, e.g. 17.5%.) Net profit margin =____________%
Explanation / Answer
Equity:
= $5,087,200×50%
= $2,543,600
Sustainable growth rate = Return on equity×(1-Dividend payout ratio)
12% = (Net profit÷$2,543,600)×(1-65%)
Net profit required = $872,091.43
Net profit margin required = 12.94%
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