MC Frasier Cabinets wants to maintain a growth ... Frasier Cabinets wants to mai
ID: 2668436 • Letter: M
Question
MC Frasier Cabinets wants to maintain a growth ...Frasier Cabinets wants to maintain a growth rate of 5 percent without incurring any additional equity financing. The firm maintains a constant debt-equity ratio of .0.55, a total asset turnover ratio of 1.30, and a profit margin of 9.0 percent. What must the dividend payout ratio be? HINT: Determine if the target growth rate is IGR/SGR. Next, use the formula to determine how much money (%) the firm can afford to payout to stockholders. You will also want to review the DuPont identity.
A. 26.26 percent
B. 38.87 percent
C. 49.29 percent
D. 61.13 percent
E. 73.74 percent
Explanation / Answer
Return on equity = 0.09 x 1.30 x (1 + 0.55) = 0.18135 Sustainable growth = [0.18135 x b]/[1 - (0.18135 x b)] = .05; b = 0.2626 Payout ratio = 1 - 0.2626 = 73.74 %
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.