Ramble On Co. wishes to maintain a growth rate of 10.6 percent per year, a debt-

Question

Ramble On Co. wishes to maintain a growth rate of 10.6 percent per year, a debt-equity ratio of 1.1, and a dividend payout ratio of 22 percent. The ratio of total assets to sales is constant at .83.

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.)

Ramble On Co. wishes to maintain a growth rate of 10.6 percent per year, a debt-equity ratio of 1.1, and a dividend payout ratio of 22 percent. The ratio of total assets to sales is constant at .83.

Explanation / Answer

Retention ratio = 1-22% = 78%

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

10.60% = (ROE × 78%) / [1 – (ROE × 78%)]

10.60%-ROE×8.268% = ROE × 78%

ROE = 12.28729%

12.28729% = Profit Margin (Profit/Sales)×(1/0.83)×(1+1.1)

Profit margin = 4.86%

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