Question

A firm wants a sustainable growth rate of 3.48 percent while maintaining a dividend payout ratio of 34 percent and a profit margin of 8 percent. The firm has a capital intensity ratio of 2. What is the debt–equity ratio that is required to achieve the firm's desired rate of growth?

a. .64 times

b. .73 times

c. .66 times

d. .22 times

e. .27 times

If there are any shortcuts on a financial calculator, that would be helpful. I am using a ti-84 plus. Thanks.

Answer 1

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Answer:

Retention ratio = 1 - 0.34 = 0.66

0.0348 = ROE*0.66/(1- (0.66*ROE))

0.0348 - 0.022968ROE = 0.66ROE

=> ROE = 0.0348/0.683 = 0.051 = 5.1%

=> Total asset turnover = 0.5

= 0.051/0.08*0.5 = 1.275

=> Debt equity ratio = 1.275 - 1 = 0.27