A Firm Has a Debt Equity Ratio of 1/3, and Plans

A firm has a debt equity ratio of 1/3, and plans to grow at an annual rate of 10%.Its return on equity is 18%.What is the maximum payout ratio that a company can maintain without resorting to new equity issue?

A) 24%
B) 25%
C) 26%
D) 27% If = , then =
Internal growth rate = Plowback ratio * ROE_BEG *
) 10 = Plowback ratio * .18 * .75
Plowback ratio = .10/(.18 * .75) = .74 = 74%