Question

A firm wishes to maintain an internal growth rate of 8.5 percent and a dividend payout ratio of 43 percent. The current profit margin is 9 percent, and the firm uses no external financing sources.

What must total asset turnover be?

(Enter your answer rounded to 4 decimal places. For example, 1.23456 should be entered as 1.2346)

Answer 1

Retention Ratio = 1 - Dividend Payout Ratio

= 1 - 43%

= 57%

Internal Growth Rate = ( Return on Assets * Retention Ratio) / [ 1-( Return on Assets * Retention Ratio)]

0.085= (Return on Assets* 0.57) / [1- ( Return on Assets *0.57) ]

or 0.085*  [1- ( Return on Assets *0.57) ] =(Return on Assets* 0.57)

or 0.085- (0.04845* Return on Assets)  = 0.57* Return on Assets

Hence, Return on Assets = 0.085 / ( 0.57 +0.04845)

or Return on Assets = 13.74403751%

Return on Assets = Net Income / Total Assets

Hence, Net Income = 13.74403751% * Total Assets

  Total asset turnover= Sales / Total Assets

= ( Net Income / 0.085) / ( Net Income / 0.1374403751)

= 1.616945589 (approx)

Hence the correct answer is 1.6169