The firm RH. Nicholson has a return on equity of25% based on sales of $6 million

Question

The firm RH. Nicholson has a return on equity of25% based on sales of $6 million, with a S6 million asset base. The company has a debt-to-equity ratio of 1.0 and never pays dividends. What is R.H. Nicholson's sustainable growth rate? The firm is willing to sacrifice some sustainable growth by paying a dividend, but the firm will not allow for a sustainable growth rate below 25%. what is the largest dividend (based on the dividend payout ratio) that the firm can pay? What is the equivalent retention ratio, assuming the dividend is paid? 212.

Explanation / Answer

Answer :

Return on equity = 25%

Debt to equity =1

Sustanable growth rate = Return on equity (1-payout ratio)

Sustainable growth rate taken as maximum 25% because in in firm does not allow for sustainable growth rate below 25%

25%= 25%(1-payout ratio)

if anything paid as dividend the firm sustainable growth rate below 25%. payout ratio is 0.

payout ratio is 0 means retention ratio is 100%

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