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You are the Financial Manager of Linkedin Inc. You wish to maintain a growth rate of...

You are the Financial Manager of Linkedin Inc. You wish to maintain a growth rate of 12% per year and a debt-equity ratio of .30. Profit Margin is 5.9%, and the ratio of Total Assets to Sales is constant at .85. Is this growth rate possible?

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Answer #1

Sustainable growth rate = (ROE*b)/[1-(ROE*b)], where b = 1-payout ratio.

We first need to compute ROE. ROE = profit margin*total assets turnover*equity multiplier

= 0.059*1/0.85*(1+0.3)

= 0.0902 or 9.02%

Now we will put the value of 9.02% in the equation: Sustainable growth rate = (ROE*b)/[1-(ROE*b)]

Thus, 0.12 = 0.0902b/(1-0.0902b)

solving the above equation we get b = 1.19

Thus payout ratio = 1-b = 1-1.19 = -0.19

IT IS NOT POSSIBLE TO HAVE A NEGATIVE PAYOUT RATIO. Thus, the growth rate of 12% is not possible for Linkedin.

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