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A firm wishes to maintain a growth rate of 8 percent a year, a debt-equity ratio...

A firm wishes to maintain a growth rate of 8 percent a year, a debt-equity ratio of 0.34, and a dividend payout ratio of 52 percent. The ratio of total assets to sales is constant at 1.3. What profit margin must the firm achieve?

Rentention ratio = 1-0.52 = 0.48
Sustainable growth rate = 0.08 = (ROE) x 0.48) / (1- (ROE x 0.48) ROE = 0.1543
Return on equity = 0.1543 = PM x (1/1.3) x (1+0.34) profit margin = 14.97%


What does ROE in this instance stand for? Why do they use ROE and not numbers? What does PM stand for? Again, why don't they use numbers instead of the letters?
Thank you, Mary

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