Question

An all-equity-financed firm plans to grow at an annual rate of at least 19%. Its return...

An all-equity-financed firm plans to grow at an annual rate of at least 19%. Its return on equity is 31%. 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.)

Answer: Maximum dividend payout ratio %

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Answer #1

when a firm is 100% equity financed , then total assets equal total equity and ROA equal ROE

We know,

internal growth rate = plowback ratio * ROE * equity/ assets

0.19 = plowback ratio * ROA *1

0.19 = plowback ratio * 0.31

0.612903 = plowback ratio

thus,

dividend payout ratio = 1- plowback ratio

= 1- 0.612903= 0.387096 or 38.709%

therefore, to remain 100% equity financed without resorting to additional equity issues the firm must keep its payout ratio at 38.709% or lower to achieve its desired rate of growth .

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