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Frasier Cabinets wants to maintain a growth rate of 5 percent without incurring any additional equity financing. The firm maintains a constant debt-equity ratio of .55, a total asset turnover ratio of 1.30, and a profit margin of 9 percent. What must the dividend payout ratio be?

Respuesta :

abiolataiwo2015

Answer:

73.74 %

Explanation:

Calculation for dividend payout ratio

First step is to calculate Return on equity

Return on equity = 0.09 ×1.30 ×(1 + 0.55)

Return on equity= 0.18135

Second step is to calculate Sustainable growth

Sustainable growth = [0.18135 ×b]/[1 - (0.18135 ×b)]

0.05 = (0.18135 x b)/ ( 1- (0.18135 x b))

b = 0.2626

Last step is to calculate the Dividend Payout ratio

Dividend Payout ratio = 1 - 0.2626

Dividend Payout ratio=0.7374*100

Dividend Payout ratio = 73.74 %

Therefore Dividend Payout ratio will be 73.74 %

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