An all-equity-financed firm plans to grow at an annual rate of at least 27%. Its
ID: 2772822 • Letter: A
Question
An all-equity-financed firm plans to grow at an annual rate of at least 27%. Its return on equity is 42%. What is the maximum possible dividend payout rate the firm can maintain without resorting to additional equity issues? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)
An all-equity-financed firm plans to grow at an annual rate of at least 27%. Its return on equity is 42%. What is the maximum possible dividend payout rate the firm can maintain without resorting to additional equity issues? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)
Explanation / Answer
The maximum possible dividend payout rate the firm can maintain without resorting to additional equity issues is 35.7%
Internal Growth Rate =27% Return on Equity (ROE) = 42% Internal growth rate (g)= ROE*retention ratio Internal growth rate (g)= ROE*(1-Dividend Payout Ratio) 0.27=0.42*(1-Dividend Payout Ratio) 1-Dividend Payout Ratio= 0.643 Dividend Payout Ratio= 1-0.643 Dividend Payout Ratio= 35.7%Related Questions
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