Expected Growth Rate of the Firm

Calculating the Expected Growth Rate

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Question

Given that the expected dividend payout ratio is 0.34, the expected net profit margin is 0.16, the expected total asset turnover is 0.94, the expected return on capital is 0.24, and the expected financial leverage multiplier is 1.13, what is the expected growth rate of the firm?

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A. B. C. D. E. F.

B

The expected growth rate of the firm is equal to the expected retention rate multiplied by the expected return on equity. The return on equity is equal to the expected net profit margin multiplied by theexpected total asset turnover multiplied by the expected financial leverage multiplier (0.16 x 0.94 x 1.13 = 0.17). The expected retention rate is equal to 1 minus the expected dividend payout ratio (1 - 0.34 = 0.66). In this question, the expected growth rate is equal to 0.66 x 0.17 =

0.11 = 11%

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