Answer:
Option E is correct. Pay out ratio is 73.74 %
Explanation:
Payout ratio shows how much portion of the net earning the company pay to its shareholders in form of cash dividend. Higher pay out ratio implies that company pay large portion of its earning to shareholder.
Mathematically, pay out ratio is = 1 - Retention Ratio ------ (a)
Retention ration shows portion of the earning that the company has retained for future investment or operation or growth.
Given data
Growth rate = 5 % or 0.05
Debt to equity ratio = 0.55
Assets turn over = 1.30
Profit Margin = 9 % or 0.09
Retention ration can be calculated from sustainable growth ratio formula.
Sustainable growth rate = Retention ratio x Return on equity
Sustainable growth rate means the growth rate that the company wants to maintain in future.
Retention ratio = Sustainable growth rate / Return on equity ---- (b)
Return on equity is not given the question but it can be calculated from Du Pont equation.
According to Du Pont equation,
Return on Equity = Profit Margin x Assets Turn Over x Financial leverage
Return on Equity = 0.09 x 1.30 x ( 1 + 0.55) = 0.18135
Let r be retention ratio, Then
Sustainable growth rate = (0.18135 x r)/ ( 1- (0.18135 x r))
0.05 = (0.18135 x r)/ ( 1- (0.18135 x r))
r = 0.2626 = Retention ratio
Putting the value of retention ratio in equation (a)
Payout ratio = 1 - Retention ratio = 1 - 0.2626 = 0.7374 or 73.74 %.
