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Loreto Inc. has the following financial ratios: asset turnover = 2.60; net profit margin (i.e., net...

Loreto Inc. has the following financial ratios: asset turnover = 2.60; net profit margin (i.e., net income/sales) = 4%; payout ratio = 25%; equity/assets = 0.30.

a. What is Loreto's sustainable growth rate?

b. What is its internal growth rate?

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Answer #1

Ans:- (a) Sustainable growth rate = ROE*Retention ratio.

ROE = Net Profit Margin * Asset turnover ratio * Equity Multiplier.

Note:- Equity Multiplier = Total assets / Total equity, we know that equity / assets is 0.30, so assets / equity will be 1/0.30

Retention ratio = 1 - Payout ratio

(b) Internal growth rate = ROA * Retention ratio

ROA = Asset turnover ratio * Net profit margin.

Note:- If this answer helps you pls give thumbs up.

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