Question

What is the profit margin for a firm with the following: dividend payout ratio of 55 percent, capital intensity ratio of 1.4, debt-equity ratio of .68, and sustainable growth rate of 6.2 percent

Answer 1

2.33%

Step-by-step explanation:

Capital intensity ratio=total assets /sales=1.4

debt-equity ratio=debt/equity=0.68 ( debt is 0.68 while equity is 1 since 0.68/1=0.68)

total assets=debt+equity=0.68+1=1.68

return on equity=sustainable growth rate*retention rate

sustainable growth rate=6.2%

retention rate=1-dividend payout ratio=1-55%=45%

return on equity=6.2%*45%=2.79%

Using the point formula , the return on equity formula is given below:

return on equity=profit margin*asset turnover*assets/equity

return on equity=2.79%

profit margin is the unknown

asset turnover=sales/total assets=1/Capital intensity ratio=1/1.4

assets/equity=1.68/1=1.68

2.79%=profit margin*1/1.4*1.68

2.79%=profit margin*1.20

2.79%/1.20=profit margin

profit margin=2.33%