Marcie's Mercantile wants to maintain its current dividend policy,which is a payout ratio of 35 percent.The firm does not want to increase its equity financing but is willing to maintain its current debt-equity ratio.Given these requirements,the maximum rate at which Marcie's can grow is equal to:

Question

Quizplus · Accepted Answer

The sustainable rate of growth is the maximum rate at which a company can grow without changing its debt-equity ratio. Since Marcie's wants to maintain its current debt-equity ratio, the sustainable rate of growth is the relevant measure. Therefore, the maximum rate at which Marcie's can grow is equal to the sustainable rate of growth, which is given by:

Sustainable rate of growth = (1 - Payout ratio) x Return on equity
= (1 - 0.35) x Return on equity
= 0.65 x Return on equity

Since Marcie's is not willing to increase its equity financing, the return on equity will remain constant. Therefore, the maximum rate at which Marcie's can grow is equal to 0.65 times the return on equity, or:

Maximum rate of growth = 0.65 x Return on equity.

Marcie's Mercantile Wants to Maintain Its Current Dividend Policy,which Is