Question

High Flyer, Inc., wishes to maintain a growth rate of 15.75 percent per year and a debt–equity ratio of .85. The profit margin is 4.9 percent, and total asset turnover is constant at 1.09.
  
What is the dividend payout ratio? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  
Dividend payout ratio             %
  
What is the maximum sustainable growth rate for this company? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  
Sustainable growth rate             %

Answer 1

ROE =(Profit margin)*(Total asset turnover)*(Equitymultiplier)

=4.9%*(1.09)*(1+.85)

=9.88%

Sustainable growth rate= [(ROE)(b)] / [1 – (ROE)(b)

Sustainable growth rate =15.75%

b=retention ratio

Payout ratio =1-b

=15.75%=(9.88%*b)/[1 – (9.88%)(b)

b= 1.377218

Dividend Payoutratio= 1 – 1.377218 =-37.71%

dividend payout ratio is negative which is impossible growth rate is inconsistent with the other constraints

The lowest possible payout rate is zero, which correspondsto a retention ratio of one

The maximum sustainable growth rate for this company is

= [(ROE)(b)] / [1 – (ROE)(b)]

= [0.0988(1)] / [1 – 0.0988(1)]

Sustainable growth rate =10.96%