Question

Fix-It Co. wishes to maintain a growth rate of 9.89 percent a year, a constant debt-equity ratio of .42, and a dividend payout ratio of 40 percent. The ratio of total assets to sales is constant at 1.3. What profit margin must the firm achieve?

Answer 1

Answer:

5.43%

Explanation:

Using du point formula for return on equity formula, the profit margin can be computed by rearranging the formula to make profit margin the subject.

return on equity=profit margin*assets turnover*leverage ratio

return on equity=growth rate*(1-dividend payout ratio)=9.89%*(1-40%)=5.93%

assets turnover=sales/total assets=inverse of total assets to sales=1/1.3

leverage ratio=total assets/equity

debt-equity ratio=0.42( debt is 0.42 while equity is 1 i.e 0.42/1=0.42)

total assets=debt+equity=0.42+1=1.42

equity is 1

5.93%=profit margin*1/1.3*1.42/1

5.93%=profit margin*1.092307692

profit margin=5.93%/1.092307692

profit margin=5.43%