Hello

I've recently completed a CREDIT QUIZ for a Corporate Finance course and was given the answers to questions which were incorrect. Can I please have a full/greater breakdown of the equations in the following question so that I can review the approach in solving it.

Thank you

QUESTION 6: Given the following information, what is the desired profit margin (P)?

D/E = 2

Current Profit Margin = 10%

R = 0.6

Capital Intensity Ratio = 2

Desired Sustainable Growth Rate = 15%

ANSWER

Capital Intensity Ratio = A/S = 2

=>S/A = 1/2 = 0.5

(This is OK, I understand)

Sustainable Growth Rate = Sg = (ROE x R) / [1 - (ROE x R)]

=>0.15 = (ROE x 0.6) / [1 - (ROE x 0.6)]

*Fuller breakdown starting here*

=>0.15 - 0.15(ROE x 0.6) = (ROE x 0.6)

=>0.15 = (ROE x 0.6) + 0.15(ROE x 0.6)

=>0.15 = 1.15(ROE x 0.6)

=>ROE x 0.6 = 0.15/1.15 = 0.130434782

=>ROE = 0.217391304

ROE = p(S/A)(1 + D/E)

0.217391304 = p (0.5) (1 + 2)

=> 0.217391304 = 1.5 p

=> p = 0.217391304 / 1.5 = 0.144927536

(This is OK, I understand)

The correct answer is: 14.5%