In a changing economy, a firm has experienced a fall in profit margin by 25%, a fall in asset turnover of 15% and an increase in financial leverage of 20%. If the firm increases its payout ratio from 30% to 40%, what's the change in its dividend growth rate?
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A. B. C. D.C
Use g = ROE * retention ratio -
ROE = profit margin * asset turnover * financial leverage.
The change in ROE equals (1-25%)*(1-15%)*(1+20%) - 1 = -23.5%. The retention ratio decreases from 70% to 60%. Therefore, the change in the growth rate equals (1-23.5%)*60/70 - 1 = -34.43%. Thus, the growth rate falls by 34.43%.