A firm wishes to maintain an internal growth rate of 9 percent and a dividend pa

Question

A firm wishes to maintain an internal growth rate of 9 percent and a dividend payout ratio of 40 percent. The current profit margin is 6.2 percent and the firm uses no external financing sources.

What must total asset turnover be? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

TOTAL ASSET TURNOVER ????

A firm wishes to maintain an internal growth rate of 9 percent and a dividend payout ratio of 40 percent. The current profit margin is 6.2 percent and the firm uses no external financing sources.

Explanation / Answer

The retention ratio is: b = 1 – 0.40 = 0.60

Now, use the internal growth rate equation and solve for ROA:

IGR = (ROA × b) / [1 – (ROA × b)]

0.09 = [ROA × 0.60] / [1 – (ROA × 0.60)]

0.6ROA = 0.09 – 0.054ROA

0.654ROA = 0.09

ROA = 0.09 / 0.654

ROA = 13.76%

Finally, plugging ROA and PM into the equation we began with and solving for TAT, we get:

ROA = PM × TAT

0.1376 = 0.062 × TAT

TAT = 0.1376 / 0.062 = 2.22

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