Question

A firm wishes to maintain an internal growth rate of 8 percent and a dividend payout ratio of 36 percent. The current profit margin is 5.8 percent and the firm uses no external financing sources. What must total asset turnover be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

2.16 times

Explanation:

Given that,

Internal growth rate = 8 percent

Dividend payout ratio = 36 percent

Current profit margin = 5.8 percent

Therefore,

Internal Growth Rate = (1 - Dividend Payout Ratio) × ROA

8% = (1 - 36%) × ROA

0.08 = 0.64 × ROA

ROA = 0.08 ÷ 0.64

        = 0.125

ROA = Profit Margin × Total Asset Turnover

0.125 = 0.058 × Total Asset Turnover

Total Asset Turnover = 0.125 ÷ 0.058

                                   = 2.16 times