Question Three ( 5 Marks) Internal Growth.

Bally Forward Firm has a growth rate of 30 percent per year. It is an all-equity financed and has total assets of K1 million. Its return on equity is 20 percent. Its plowback ratio is 40 percent.

a. What is the internal growth rate?

b. What is the firms need for external financing this year?

c. By how much would the firm increase its internal growth rate if it reduced its payout ratio to zero?

d. By how much would such a move reduce the need for external financing? What do you conclude about the relationship between dividend policy and requirements for external financing?

e. Suppose the firm has a debt-equity ratio of 13. What is the maximum dividend payout ratio it can maintain without resorting to any external?