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    Sustainable growth rate, effective rate of interest

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    1) A firm's profit margin is 10% and its asset turnover ratio is .6. It has no debt, has net income of $10 per share, and pays dividends of $4 per share. What is the sustainable growth rate?

    2) A bank loan has a quoted annual rate of 6%. However, the borrower must maintain a balance of 25% of the amount of the loan, and the balance does not earn any interest.

    a) What is the effective rate of interest if the loan is for 1 year and is paid off in one payment at the end of the year?

    b) What is the effective rate of interest if the loan is for 1 month?

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    Solution Preview

    1) A firm's profit margin is 10% and its asset turnover ratio is .6. It has no debt, has net income of $10 per share, and pays dividends of $4 per share. What is the sustainable growth rate?

    Asset turnover ratio=0.6

    Profit margin=10%

    Therefore

    Earnings on equity=6.00%=0.6*0.1

    Earning per share=$10

    Dividend=$4

    Plowback ratio= ...

    Solution Summary

    Answers two questions on : 1) sustainable growth rate, 2) effective rate of interest

    $2.49

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