Decorative Interiors wants to maintain a growth rate of 7% without incurring any additional equity ﬁnancing. The ﬁrm maintains a constant debt-equity ratio of .6, a total asset turnover ratio of .75,
And a proﬁt margin of 6 percent. What must the dividend payout ratio be?

Question

Quizplus · Accepted Answer

The sustainable growth rate formula is: g = ROE * (1 - payout ratio). ROE can be calculated as (Profit Margin * Total Asset Turnover * Equity Multiplier). Given the debt-equity ratio of 0.6, the equity multiplier is 1.6. Therefore, ROE = 0.06 * 0.75 * 1.6 = 0.072. Solving for the payout ratio: 0.07 = 0.072 * (1 - payout ratio), gives a payout ratio of approximately 9.1%.

Decorative Interiors Wants to Maintain a Growth Rate of 7