Question

A firm wishes to maintain an internal growth rate of 7.4 percent and a dividend payout ratio of 20 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.) Total asset turnover times

Answer 1

Solution:

As per the information given in the question we have

Internal Growth rate = 7.4 % = 0.074

Dividend Payout ratio = 20 % = 0.20

The formula for calculating the Internal growth rate is

Internal Growth Rate = Return on Assets * ( 1 - Dividend Payout ratio )

Applying the above information in the formula we have

0.074 = ROA * ( 1 – 0.20 )

0.074 = ROA * 0.80

0.074 / 0.80 = ROA

ROA = 0.074 / 0.80

ROA = 0.0925

ROA = 9.25 %

Calculation of Total Asset Turnover Ratio:

The formula for calculation of Total Asset Turnover Ratio is

= Return on Assets / Profit Margin

As per the information available we have

Return on Assets = 9.25 %   ;   Profit Margin = 5.8 %

Applying the above information in the formula we have

= 9.25 % / 5.8 %

= 0.0925 / 0.058

= 1.594828

= 1.59 ( when rounded off to two decimal places )

Thus the Total Asset Turnover Ratio = 1.59 times