Last year, Marly Brown, Inc., reported an ROE of 20 percent. The firm’s debt-to-equity was 1.50 times, sales were $20 million, the capital intensity was 1.25 times, and dividends paid to common stockholders were $1,000,000. The firm has no preferred stock outstanding. This year, Marly Brown plans to decrease its debt-to-equity ratio to 1.20 times. The change will not affect sales, total assets, or dividends paid, however, it will reduce the firm’s profit margin to 9.85 percent. Use the DuPont equation to determine how the change in Marly Brown’s debt ratio will affect its internal growth rate.
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