Question

Fulkerson Manufacturing wishes to maintain a sustainable growth rate of 8.5 percent a year, a debt–equity ratio of .53, and a dividend payout ratio of 26 percent. The ratio of total assets to sales is constant at 1.22.
  
What profit margin must the firm achieve in order to meet its growth rate goal? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  
Profit margin             %

Answer 1

Retention ratio=1-dividend payout ratio

=1-0.26

=0.74

sustainable growth rate =(ROE*Retention ratio)/[1-(ROE*Retention ratio)]

0.085=(ROE*0.74)/[1-(ROE*0.74)]

0.085[(1-(ROE*0.74)]=0.74ROE

0.085-0.0629ROE=0.74ROE

ROE=0.085/(0.74+0.0629)

=0.105866234

Debt-equity ratio=debt/equity

Hence debt=0.53equity

Let equity be $x

Hence debt=$0.53x

Total asset=debt+equity

=$1.53x

Equity multiplier=Total assets/equity

=1.53x/x

=1.53

ROE=Profit margin*Total asset turnover*Equity multiplier

0.105866234=Profit margin*(1/1.22)*1.53

Profit margin=(0.105866234*1.22)/1.53

which is equal to

=8.44%(Approx).