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A firm plans to grow at an annual rate of at least 25%. Its return on equity is 39%. Suppose the firm has a debt-equity ratio of 1/4. What is the maximum dividend payout ratio it can maintain without resorting to any external financing? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Maximum dividend payout ratio

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Answer #1

Self sustainable growth rate SSGR is max growth possible without external financing.

SSGR=ROE*retention ratio

25%=39%* retention ratio

Retention ratio = 64.1%

Payout ratio = 1- retention ratio = 1-64.1%=35.9%

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