Expected Net Profit Margin Calculation | CFA Level 1 Exam Preparation

Expected Net Profit Margin

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Question

Given that the expected growth rate for a firm is 5%, the expected total asset turnover is 0.87, the expected financial leverage multiplier is 0.81, the expected return on capital is 1.4, and expected retention rate is 60%, what is the expected net profit margin of the firm?

Answers

A. 11.8%

B. 12.3%

C. 14.8%

D. Not enough information

E. 6.9%

F. 9.3%

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Explanations

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A. B. C. D. E. F.

The growth rate of a firm is equal to the expected retention rate multiplied by the expected return on equity. Rearranging this yields that the expected ROE is equal to the growth rate divided by the retention rate (ROE = 0.05/0.60 = 0.0833). The expected ROE is itself equal to the expected profit margin multiplied by the expected asset turnover multiplied by the expected financial leverage multiplier. Rearranging this yields that the expected net profit margin is equal to the ROE divided by the total asset turnover and the financial leverage multiplier (0.0833 / (0.87 x 0.81) = 0.118 = 11.8%

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