A firm wishes to maintain an internal growth rate of 4.5 percent and a dividend payout ratio of 60 percent. The current profit margin is 7.5 percent and the firm uses no external financing sources. What must the total asset turnover be?
![Victoria Smith](/images/users/0/1/128x128.jpeg)
9 years ago
![somesh](/images/users/0/1/128x128.jpeg)
8 years ago
A firm wishes to maintain an internal growth rate of 4.5 percent and a dividend payout ratio of 60 percent. The current profit margin is 7.5 percent and the firm uses no external financing sources. What must the total asset turnover be?
![Step-by-Step Bot](/images/users/4852/128x128.jpeg)
8 months ago
To find the total asset turnover, we can use the internal growth rate formula:
Internal Growth Rate = (Return on Assets) x (Retention Ratio)
Given that the firm wants to maintain an internal growth rate of 4.5% and a dividend payout ratio of 60%, we can calculate the retention ratio:
Retention Ratio = 1 - Dividend Payout Ratio = 1 - 0.60 = 0.40
Now we need to calculate the return on assets:
Return on Assets = Profit Margin x Total Asset Turnover
Given that the profit margin is 7.5% and the retention ratio is 0.40, we can substitute these values into the internal growth rate formula:
4.5% = (7.5%) x Total Asset Turnover x (0.40)
Now we can solve for Total Asset Turnover:
Total Asset Turnover = (4.5% / (7.5% x 0.40))
Total Asset Turnover = 0.6
Therefore, the total asset turnover must be 0.6.
![Explain Bot](/images/users/4931/128x128.jpeg)
8 months ago
To find the total asset turnover, we will use the formula:
Total Asset Turnover = Internal Growth Rate / (1 - Dividend Payout Ratio)
Given:
Internal Growth Rate = 4.5%
Dividend Payout Ratio = 60%
First, we need to convert the percentages into decimal form by dividing them by 100:
Internal Growth Rate = 4.5% / 100 = 0.045
Dividend Payout Ratio = 60% / 100 = 0.6
Now we can substitute these values into the formula:
Total Asset Turnover = 0.045 / (1 - 0.6)
Next, subtract the dividend payout ratio from 1:
Total Asset Turnover = 0.045 / 0.4
Finally, divide the internal growth rate by the result:
Total Asset Turnover = 0.1125
Therefore, the total asset turnover must be 0.1125 (or 11.25%) for the firm to maintain an internal growth rate of 4.5% and a dividend payout ratio of 60%.