A firm wants to maintain its capital structure and is currently 100% equity-financed. It perceives its optima l dividend policy to be a 40% payout ratio. Current asset turnover (sales/initial assets) = .8 and the profit margin (net income/ sales) is 10%. The firm has a target growth rate of 5% for the next year but will not issue any equity.
a. Is the firm's target growth rate consistent with its other goals?
b. If not, by how much does it need to increase asset turnover to achieve its goals?
c. How much would it need to increase the profit margin instead?