A mature firm, in the face of a new product introduced by its competition, has suddenly seen its profit margins fall by 50%. The market expects the management to streamline its sales force in a very short time and increase the sales-to-assets ratio by 30%. The dividend growth rate due to these changes will:
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A. B. C. D.D
Use g = ROE * retention ratio and
ROE = profit margin * asset turnover * financial leverage.
If profit margin falls by 50% and asset turnover increases by 30%, the change in ROE is (1-0.5)*(1+0.3) - 1 = -0.35. With retention ratio constant, a 35% fall in
ROE translates into a 35% fall in dividend growth rate.