Question

A firm has adopted a policy where it uses no external financing. What is the maximum possible growth rate of the firm if net income is 9,600, total equity is 66,000, total assets are 150,000 and 30% dividend payout ratio

a. 10.19

b 6.84

c 11.33

d 4.69

e.14.55

Answer 1

Given

Net Income = 9600

Total Equity = 66000

Total Assets = 150000

Dividend Payout Ratio = 30%

The formula for Growth Rate is

Growth Rate = Net Income/ Total Equity*(1- Dividend Payout Ratio)

Putting the respective values in the formula we get

Growth Rate = 9600 / 66000 *( 1-.30)

= 0.1454545* 0.70

= 10.1818

= 10.19% ......ANS

In the above formula Net Income divided by Total Equity is nothing but Return on Equity or ROE and (1- DP ratio) is retention ratio

Therefore Growth Rate can also be given by the formula = ROE * Retention Ratio .