Assume the following ratios are constant The firm does not w

Assume the following ratios are constant:

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?

Handout 5: Assume the tollowing 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 WHAT?

Solution

The maximum rate at which this firm can grow is termed as Sustainable Growth Rate - SGR.

SGR = ROE x (1 - dividend-payout ratio)

ROE = Net profit margin * Equity Multiplier

As per given data ,

ROE = 6.60% * 1.5 = 9.90 %

SGR = 0.099 * ( 1- 0.25) = 0.07425 = 7.425% growth rate .