A Firm Has a Retention Ratio of 40 Percent and a Sustainable

Multiple Choice

A firm has a retention ratio of 40 percent and a sustainable growth rate of 6.2 percent.The asset turnover ratio is 0.85 and the assets-to-equity ratio (using beginning-of-period equity) is 1.80.What is the profit margin?

A) 3.79 percent
B) 5.69 percent
C) 6.75 percent
D) 10.13 percent
E) 18.24 percent 0.062 = PRAT = profit margin x .40 x 0.85 x 1.80
Profit margin = 0.062/(.40 x 0.85 x 1.80) ; profit margin = 10.13 percent