A firm has decided that its optimal capital structure is 100% equity financed. I

Question

A firm has decided that its optimal capital structure is 100% equity financed. It perceives its optimal dividend policy to be a 60% payout ratio. Asset turnover is sales/assets = .4, the profit margin is 15%, and the firm has a target growth rate of 3%.

Calculate the sustainable growth rate. (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

If not, what should the asset turnover be to achieve its goals? (Do not round intermediate calculations. Round your answer to 3 decimal places.)

Instead, what would the profit margin need to be to achieve its goals? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

A firm has decided that its optimal capital structure is 100% equity financed. It perceives its optimal dividend policy to be a 60% payout ratio. Asset turnover is sales/assets = .4, the profit margin is 15%, and the firm has a target growth rate of 3%.

Explanation / Answer

1- Return on equity = asset turnover * profit margin * financial utilization rate

= .4*.15*1 = 6%

2- sustainable growth rate = ROE*retnetion ratio = .6*.4 = 2.4%

a-2 it is not consostent with the other goals of the organization

b - To achieve the goals of target 3% company should have asset turnover of .5

ROE = .5*.15 =7.5%

sustainable growth rate = ROE*retnetion ratio = .75*.4 = 3%

c- Return on equity = asset turnover * profit margin * financial utilization rate

                                       .4*1*profit margin = 7.5

Profit margin = 7.5/ .4 =18.75

ROE = .1875*.4*1 = 7.5%

Growth rat e= 7.5*.4 = 3%

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