Question

Wishes to maintain a growth rate of 12 percent per year and a debt-equity ratio of . 4 The profit margin is 5.5 percent, and total asset turnover is constant at 1.74

a.What is the dividend payout ratio?

Answer 1

First, we need to calculate the sustainable growth rate (SGR) using the following formula:

SGR = PM * TAT * (1 - D/E)

SGR = 0.055 * 1.74 * (1 - 0.4)

SGR = 0.055 * 1.74 * 0.6

SGR = 0.0573

Now, we can calculate the dividend payout ratio using the growth rate (g) and the sustainable growth rate (SGR):

Dividend Payout Ratio = (g - SGR) / g

Dividend Payout Ratio = (0.12 - 0.0573) / 0.12

Dividend Payout Ratio ≈ 0.5242

So, the dividend payout ratio is approximately 52.42%.