Problem:
Sustainable growth. A firm has decided that its optimal capital structure is 100 percent equity financed. It perceives its optimal dividend policy to be a 40 percent payout ratio. Asset turnover is sales/assets - .8, the profit margin is 10 percent, and the firm has a target growth rate of 5 percent.
1. Is the firm's target growth rate consistent with its other goals?
2. If not, by how much does it need to increase asset turnover to achieve its goals?
3. How much would it need to increase the profit margin instead?