A firm has adopted a policy whereby it will not seek any additional external financing. Given this, what is the maximum growth rate for the firm if it has net income of $32,600, total equity of $294,000, total assets of $503,00, and a 25 percent dividend payout ratio?A) 5.11 percentB) 4.88 percentC) 6.62 percentD) 7.67 percentE) 8.37 percent

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pamateriales pamateriales · Answer 1 · 2019-11-08T20:37:52+01:00

Answer:

The maximum growth rate to my calculations is 8.32%, since it is closer to option E), I´d choose E) 8.37%

Explanation:

Hi, in order to find the growth rate given all the info of the problem, we need to use the following formula.

[tex]g=b*R[/tex]

Where:

g = growth rate

b=retention ratio

R = return on equity

Since R = Earnings / Equity, and our dividend payout ratio (equals to 1 - b)our fromula changes to:

[tex]g=(1-Payout)*\frac{NetIncome}{Equity}[/tex]

So, everything should look like this:

[tex]g=(1-0.25)*\frac{32,600}{294,000} =0.0832[/tex]

So, the growth rate is equal to 8.32% but this option is not available, therefore we´ll go for the closest one, that is E) 8.37%.

Best of luck.