Assume the following ratios are constant: The firm does not want to issue additi

Question

Assume the following ratios are constant:

The firm does not want to issue additional equity shares but does want to maintain its current debt-equity ratio and its current dividend policy. What will be the maximum rate at which this firm can grow?

Handout 5: Assume the tollowing ratios are constant: 2.6 6.60% Total asset turnover Profit margin Equity multiplier Payout ratio 25% The firm does not want to issue additional equity shares but does want to maintain its current debt-equity ratio and its current dividend policy. What will be the maximum rate at which this firm can grow WHAT?

Explanation / Answer

The maximum rate at which this firm can grow is termed as Sustainable Growth Rate - SGR.

SGR = ROE x (1 - dividend-payout ratio)

ROE = Net profit margin * Equity Multiplier

As per given data ,

ROE = 6.60% * 1.5 = 9.90 %

SGR = 0.099 * ( 1- 0.25) = 0.07425 = 7.425% growth rate .

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