Question

A firm wishes to maintain a growth rate of 13.2 percent and a dividend payout ratio of 36 percent. The ratio of total assets to sales is constant at 0.70, and profit margin is 7.9 percent.

If the firm also wishes to maintain a constant debt-equity ratio, what must it be?

Answer 1

1)	SGR = ROE*b/(1-ROE*b)
	0.132 = ROE*0.64/(1-ROE*0.64)
	Solving for ROE
	0.132-ROE*0.64*0.132 = ROE*0.64
	0.132 = ROE*0.72448
	ROE = 0.132/0.72448 = 18.22%
2)	As per DuPont identity
	ROE = (Sales/Total assets)*(Net income/Sales)*(Total assets/Equity)
	Substituting available values we have
	0.1822 = (1/0.70)*0.079*(Total Assets/Equity)
	Now (Total Assets/Equity) or Equity multiplier = 0.1822*0.7/0.079 =	1.61
	Total assets = 1.61
	Equity = 1.00
	Debt = 1.61-1.00 = 0.61
	Debt-Equity ratio = 0.61/1.00 =	0.61
	The debt equity ratio should be 0.61:1