An All Equity Financed Firm Has an Asset Turnover of 2

question 54

Multiple Choice

An all equity financed firm has an asset turnover of 2 and its plowback ratio is 50%.Determine its net profit in order to finance a 10% internally generated growth.

• A)11%
• B)10%
• C)9%
• D)8% Internal growth rate = Plowback ratio * ROE_BEG *
• Since the firm is all-equity financed, Equity/Assets = 1 and
• ROE_BEG = ROA_BEG = Net profit margin *Asset turnover.
• Therefore, g = Plowback ratio * Net profit margin * Asset turnover
• )08 =.5 * Net profit margin * 2.0
• Net profit margin = .08 = 8%

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