An all-equity-financed firm plans to grow at an annual rate of at least 13%. Its return...
An all-equity-financed firm plans to grow at an annual rate of at least 13%. Its return on equity is 21%. What is the maximum possible dividend payout rate the firm can maintain without resorting to additional equity issues? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)
Homework Answers
Internal Growth Rate = 13%
Return on Equity = 21%
If the firm is firm with equity only, then ROE will be equal to ROA
Return on Asset = Return on Equity
Return on Asset = 21%
Internal Growth Rate = Return on Asset * Plowback Ratio
0.13 = 0.21 * Plowback Ratio
Plowback Ratio = 0.6190
Plowback Ratio = 1 - Dividend Payout Ratio
0.6190 = 1 - Dividend Payout Ratio
Dividend Payout Ratio = 0.3810 or 38.10%
So, maximum possible dividend payout rate the firm can maintain is 38.10%
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