A firm wishes to maintain a growth rate of 8 percent and a dividend payout ratio of 62 percent.The ratio of total assets to sales is constant at 1,and the profit margin is 10 percent.What must the debt-equity ratio be if the firm wishes to keep that ratio constant?
A)0.05
B)0.40
C)0.55
D)0.60
E)0.95

Question

Quizplus · Accepted Answer

Retention ratio = 1 - 0.62 = 0.38Sustainable growth rate = 0.08 = (ROE × 0.38)/[1 - (ROE × 0.38)]; ROE = 0.1949Return on equity = 0.1949 = 0.10 × (1/1) × (1 + D/E); D/E = 0.95

A Firm Wishes to Maintain a Growth Rate of 8