Answer to Question #160056 in Financial Math for Devon

Question

High Flyer, Inc., wishes to maintain a growth rate of 12 percent per year and a debt-equity ratio of .25. The profit margin is 5 percent, and total asset turnover is constant at 1.20.

   a.What is the dividend payout ratio?

Answer 1

$Debt\ equity\ ratio\ =\ Debt/Equity\ =\ 0.25$

$Total\ assets\ =\ Debt\ +\ Equity\ =\ 0.25\ +\ 1\ =\ 1.25$

$Equity\ multiplier\ =\ Total\ assets/Equity\ =\ 1.25/1\ =\ 1.25$

$Profit\ Margin\ =\ 5\%$

$Total\ assets\ Turnover\ ratio\ =\ 1.20$

$ROE \ as\ per\ dupont \ model = Profit margin * Total\ assets\ turnover \ *\ Equity multiplier$

$= 5\% \ * 1.20\ * \ 1.25$

$= 7.5\%$

$Growth\ rate\ =\ Retention\ ratio\ \ast \ ROE$

$12 \%\ =\ Retention\ ratio\ \ast\ 7.5\%$

$Retention\ ratio \ = \frac {12\%} {7.5\%} = \ 1.6$

$Dividend\ payout\ ratio\ =\ 1\ -\ Retention\ ratio\ =\ 1\ -\ 1.6\ =\ -0.60$

$the\ dividend\ payout\ ratio\ will\ be\ 60 \%$