Given the following information, what is the desired profit margin? D/E = 2 Current profit margin...
Given the following information, what is the desired profit
margin?
D/E = 2
Current profit margin = 10%
R = 0.65 Capital intensity ratio = 2
Desired sustainable growth rate = 15%
Homework Answers
Desired sustainable growth rate = ROE * b
15% = ROE * 0.65
ROE = 15% / 0.65 = 23.08%
Capital Intensity Ratio = 1 / Asset Turnover Ratio
2 = 1 / Asset Turnover Ratio
Asset Turnover Ratio = 1 / 2 = 0.50
Financial Leverage = Total Assets / Total Equity
= [2 + 1] / 1 = 3
ROE = Profit Margin * Asset Turnover * Financial Leverage
23.08% = Profit Margin * 0.5 * 3
Profit Margin = 23.08% / 1.5 = 15.38%
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