Abacus Co. wishes to maintain a growth rate of 11.8 percent a year, a

QUESTION

Abacus Co. wishes to maintain a growth rate of 11.8 percent a year, a debtequity ratio of 1.7, and a dividend payout ratio of 20 percent. The ratio of total assets to sales is constant at 0.89.What profit margin must the firm achieve?
Solution: For Abacus Co.: Sustainable Growth Rate = ROE*(1-Dividend Payout Ratio) Growth Rate = 11.8% Dividend Payout Ratio = 20% So, Return on Equity (ROE)= 11.8%/(1-20%) = 14.75% DebtEquity Ratio = 1.7 Total Assets to Sales = 0.89 Return on Equity = Profit¦

Margin*Asset Utilization*Equity Multiplier = Profit Margin*(Net Sales/Total Asset)*(1+ Debt/Equity) = Profit Margin*(1/0.89)*(1+1.7) So, Profit Margin = 14.75%/3.0337 = 4.862%

ANSWER:

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