DigIt! Corporation has the following financial characteristics: its profit margin is 10%,its total asset turnover is 1.75,its asset to equity ratio is 1.5 and its sustainable growth rate is 20.6%.What dividend payout ratio is consistent with these values?

Question

Quizplus · Accepted Answer

We can use the formula for sustainable growth rate to calculate the retention ratio (1 - Dividend payout ratio):
Sustainable Growth Rate = (Profit Margin) x (Total Asset Turnover) x (Asset to Equity Ratio) x (Retention Ratio)
20.6% = 10% x 1.75 x 1.5 x (1 - Dividend payout ratio)
0.206 = 2.625 x (1 - Dividend payout ratio)
Dividend payout ratio = 1 - (0.206/2.625)
Dividend payout ratio = 0.92 or 92%
Therefore, the only choice that is consistent with these values is D, a dividend payout ratio of 35%.

DigIt! Corporation Has the Following Financial Characteristics: Its Profit Margin