Problem 18-21 Sustainable Growth (LO3) A firm has decided that its optimal capit
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Question
Problem 18-21 Sustainable Growth (LO3) A firm has decided that its optimal capital structure is 100% equity-financed. It perceives its optimal dividend policy to be a 45% payout ratio. Asset turnover is sales/assets-0.8, the profit margin is 10%, and the firm has a target growth rate of 5%. 20 points a-1. Calculate the sustainable growth rate. (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) growth rate Print a-2. Is the fim's target growth rate consistent with its other goals References Yes O No b. If not, what would asset turnover need to be to achieve its goals? (Do not round intermediate calculations. Round your answer to 3 decimal places.) turnover high would the preft margin need to be Instea? (Do not round intermediate calculatins, Enter your answer as a percent rounded to 1 decimal place.) Prev 7018": Next >Explanation / Answer
Sustainable growth rate=plowback ratio*RoE=(1-45%)*0.8*10%=4.4%
No, the firm targets growth rate of 5% but the sustainable growth rate is 4.4%
For sustainable growth rate to be 5%,
Keeping profit margin constant at 10%, we need Asset Turnover=5%/((1-45%)*10%)=0.9091
Keeping Asset Turnover constant at 0.8, we need profit margin=5%/((1-45%)*0.8)=11.3636%