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A firm’s profit margin is 24%, and its asset turnover ratio is .5. It has no...

A firm’s profit margin is 24%, and its asset turnover ratio is .5. It has no debt, has net income of $15 per share, and pays dividends of $6 per share. What is the sustainable growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

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Answer #1

Retained earnings per share = $15 - $6 = $9

Plowback ratio = $9/$15 = 3/5

Return on equity = Profit Margin * Asset turnover ratio = 24% * 0.5 = 12%

Sustainable growth rate = Plowback ratio * Return on equity

= 12% * 3/5 = 7.2%

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