Question

. Drazi, Inc.’s profit margin is 15%, total asset turnover is 0.8, equity multiplier is 1.25, and dividend payout ratio is 45%. The firm has no plan to raise funds externally, only counting on its own internal funding (i.e., retained earnings) to support growth. What maximum growth rate can Drazi achieve? Hint: According to the “Key Equations” on your textbook Appendix, ROA = Profit Margin x Total Asset Turnover.

Answer 1

Profit margin 15% Total asset turnover = 0.8 Dividend payout ratio = 45% = 0.45 Retention ratio 1 - Payout ratio 1 -0.45 = 0.55 Return on Asset (ROA) = Profit margin * Total asset turnover = 15% * 0.80 = 12% Maximum growth rate = ROA * Retention ratio = 12% * 0.55 = 6.6% Ans 6.6%