Given that the expected dividend payout ratio for a firm is 0.25, its expected profit margin is 0.12, its expected financial leverage is 0.95, its expected return on capital is 1.26, its expected EBIT is $403, and its expected growth rate is 8%, what is the firm's expected total asset turnover?
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A. B. C. D. E.Explanation
The growth rate of a firm is equal to expected retention rate of earnings multiplied by its expected ROE. The retention rate is equal to 1 - dividend payout ratio (1 -
0.25 = 0.75). The ROE is thereby equal to the growth rate divided by the retention rate (0.08 / 0.75 = 0.107). The ROE can be set equal the profit margin multiplied by the total asset turnover multiplied by financial leverage. Rearranging this yields that the total asset turnover is equal to the ROE divided by the profit margin and the financial leverage: 0.107 / (0.12 x
0.95) = 0.939.