Question

A firm wishes to maintain an internal growth rate of 7.1 percent and a dividend payout ratio of 25 percent. The current profit margin is 6.5 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:

1.46 times

Step-by-step explanation:

The growth,$g$ rate is defined as Return on Equity times (1-Dividend payout ration):

$g=ROE\times(1-Dividend \ Payout \ Ratio)$

Given that $g=7.1, dpr=0.25,$

The total asset turnover is calculated as:

$0.071=ROE\times(1-0.25)\\ROE=0.0947$

#We know that

$ROE=Profit \ margin \times \ Total \ Asset \ Turnover\\0.0947=0.065\times \ Total \ Asset \ Turnover\\1.4564=\ Total \ Asset \ Turnover$

Hence, turn-over required for a 7.1% internal growth is 1.4564times