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Unformatted text preview: equation to find the total asset turnover. The retention ratio is: b = 1 .25 b = .75 Using the internal growth rate equation to find the ROA, we get: Internal growth rate = (ROA b) / [1 (ROA b)] .07 = [ROA(.75)] / [1 ROA(.75)] ROA = .0872 or 8.72% Plugging ROA and PM into the equation we began with and solving for TAT, we get: ROA = (PM)(TAT) .0872 = .05(PM) TAT = .0872 / .05 TAT = 1.74 times 21. We should begin by calculating the D/E ratio. We calculate the D/E ratio as follows: Total debt ratio = .65 = TD / TA Inverting both sides we get: 1 / .65 = TA / TD Next, we need to recognize that TA / TD = 1 + TE / TD Substituting this into the previous equation, we get: 1 / .65 = 1 + TE /TD Subtract 1 (one) from both sides and inverting again, we get: D/E = 1 / [(1 / .65) 1] D/E = 1.86 With the D/E ratio, we can calculate the EM and solve for ROE using the DuPont identity:...
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- Spring '08