A firm wishes to maintain a growth rate of 10 percent and a dividend payout rati

Question

A firm wishes to maintain a growth rate of 10 percent and a dividend payout ratio of 58 percent. The ratio of total assets to sales is constant at 1, and the profit margin is 9.6 percent. If the firm also wishes to maintain a constant debt-equity ratio, what must it be? (Do not round your intermediate calculations.)

1.25

3.63

5.63

6.63

4.63

A firm wishes to maintain a growth rate of 10 percent and a dividend payout ratio of 58 percent. The ratio of total assets to sales is constant at 1, and the profit margin is 9.6 percent. If the firm also wishes to maintain a constant debt-equity ratio, what must it be? (Do not round your intermediate calculations.)

Explanation / Answer

Solution:

Total sales/Total asset = 1

Hence total sales = total asset

Profit /sales = 9.6%

Growth rate = 10%

Dividend payout = 58%

Retention = 42%

Debt equity ratio = Total debt /Total equity

Growth G = Retention ratio *Return on equity

.10 = .42* ROE

ROE = .1/.42 = 23.81%

Hence the constant debt equity would be

ROE = profit margin * asset tuenover * equity multiplier

.2381 = .096*1 * equity multiplier

Equity multiplier = .2381/.096

= 2.48

Thank you.

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