Question

A firm wishes to maintain a growth rate of 13.2 percent and a dividend payout ratio...

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?

Homework Answers

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
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