find the sustainable and internal growth rates for a firm with the following rat

Question

find the sustainable and internal growth rates for a firm with the following ratios: asset turnover = 2.40; profit margin = 5%; payout ratio = 25%; equity/assets = 0.20. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

find the sustainable and internal growth rates for a firm with the following ratios: asset turnover = 2.40; profit margin = 5%; payout ratio = 25%; equity/assets = 0.20. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Explanation / Answer

Return on equity under du pont = profit margin * asset turnover * equity/assets(leverage) = 5% * 2.40 * 0.20 = 2.40%

Return on assets = profit margin * asset turnover = 5% * 2.40 = 12%

Sustainable growth rate = Return on equity * retention ratio

= 2.40% *(1-25%) = 1.80%

Internal growth rate = Return on assets * retention ratio

= 12% *(1-25%) = 9.00%

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