A firm wants to maintain its capital structure and is currently 100% equity-financed. It perceives its optima

Question:

A firm wants to maintain its capital structure and is currently 100% equity-financed. It perceives its optima l dividend policy to be a 40% payout ratio. Current asset turnover (sales/initial assets) = .8 and the profit margin (net income/ sales) is 10%. The firm has a target growth rate of 5% for the next year but will not issue any equity.

a. Is the firm's target growth rate consistent with its other goals?

b. If not, by how much does it need to increase asset turnover to achieve its goals?

c. How much would it need to increase the profit margin instead?

Asset Turnover
Asset turnover is sales divided by total assets. Important for comparison over time and to other companies of the same industry. This is a standard business ratio. Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...