Handout Q5 Assume the following ratios are constant 26 660 T

Handout Q5: Assume the following ratios are constant: 2.6 6.60% Total asset turnover Profit margin Equity multiplier Payout ratio 25% The firm does not want to issue additional equity shares but does want to maintain its current debt-equity ratio and its current dividend policy. What will be the maximum rate at which this firm can grow?

Solution

Growth rate = Return on equity * Retention ratio

= 6.6% * 75 %

= 4.95 %

Growth rate is equal to 4.95 %