An all equity financed firm has an asset turnover of 2,and its plowback ratio is 50%.Determine its Maximum payout ratio that will allow an 8% internally generated growth.

Question

Quizplus · Accepted Answer

We can use the formula to find the growth rate: 
g = ROE * Plowback ratio 
8% = ROE * 50% 
ROE = 16%

We can use the formula to find the sustainable growth rate: 
g = Asset turnover * (1 - Payout ratio) * ROE 
8% = 2 * (1 - Payout ratio) * 16% 
Payout ratio = 1 - (8% / (2 * 16%)) 
Payout ratio = 1 - 25% 
Payout ratio = 75%

Therefore, the maximum payout ratio that will allow an 8% internally generated growth is 75%, which is closest to option B) 33% as the best choice.

An All Equity Financed Firm Has an Asset Turnover of 2,and