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Your firm's strategic plan calls for a net increase in total assets of $100 million during the next five years, which represents an annual compounded growth rate of 15%. Equity growth is also projected to be 15% per year. Assume that the firm's Total Asset Turnover will average 1.0 in each of the five years and Equity Financing percentages will remain constant at 50%. The firm projects Reported Income Index values to be 0.85 each year. What is the required Total Margin that will make this plan financially feasible?

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abiolataiwo2015

The  required Total Margin that will make this plan financially feasible is: 6.38%.

Total margin

First step is to calculate the return on equity using this formula

Return on equity=Income index×Growth rate

Let plug in the formula

Return on equity=0.85×15%

Return on equity=12.75%

Second step is to calculate total margin using this formula

Return on equity (ROE)=Total equity×Total asset turnover×Asset/Equity

Let plug in the formula

12.75%=Total equity×1×1/0.50

12.75%=Total equity×1×2

12.75%=Total margin×2

Total margin=12.75%/2

Total margin=6.375%

Total margin=6.38% (Approximately)

Therefore the required Total Margin that will make this plan financially feasible is: 6.38%.

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