Question

A firm plans to grow at an annual rate of at least 28%. Its return on equity is 43%. Suppose the firm has a debt-equity ratio of 1/4. What is the maximum dividend payout ratio it can maintain without resorting to any external financing? (Do not round intermedlate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

34.88%

Step-by-step explanation:

the sustainable growth rate = return on equity x retention rate

retention rate = 1 - dividend payout rate

so,

sustainable growth rate = return on equity x (1 - dividend payout rate)

1 - dividend payout rate = sustainable growth rate / return on equity

1 - dividend payout rate = 28% / 43% = 0.65116279

1 - 0.65116279 = dividend payout rate

0.3488 = 34.88% = dividend payout rate