AWK's CEO recently indicates that she wanted to increase AWK's earning and dividend growth rates. please...
AWK's CEO recently indicates that she wanted to increase AWK's earning and dividend growth rates. please explain to her how she can achieve it by using PRAT formula.
Homework Answers
The PRAT formula is :
P stands for profit margin
R stands for retention ratio
A stands for asset turnover
T stands for financial leverage
So, the growth can be measured by :
G = ROE* B
Where B is the retention ratio, so by keeping the retention ratio higher and paying less of dividends the firm can increase it's growth rate.
ROE = NI/ SALES * SALES/ASSETS * ASSETS/ EQUITY
By increasing the ROE also a company can increase it's growth rate. This is possible by increasing the profit margin, the asset turnover without raising finance through debt or additional equity.
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