Question

Suprenuk, Inc., wishes to maintain a growth rate of 14 percent per year and a debt-equity ratio of .4. Profit margin is 7.2 percent and the ratio of total assets to sales is constant at 1.69. |

What dividend payout
ratio is necessary to achieve this growth rate under these
constraints? |

What is the maximum growth rate possible |

Answer #1

1] | Growth rate = ROE*(1-d) where d = dividend payout | |

ratio. | ||

According to DuPont method | ||

ROE = Profit margin*Total assets turnover*Equity Multiplier | ||

ROE = 7.2*(1/1.69)*(1.4/1) = | 5.96% | |

Now [using the formula for growth rate given at first], | ||

0.14 = 0.0596*(1-d). | ||

Solving for b [dividend payout] | ||

0.1996*d = 0.0596 | ||

d = 0.0596/0.1996 = | 29.86% | |

Dividend payout required for
14% growth rate = 29.86% |
||

2] | Maximum growth rate possible maintaining the D/E is given | |

by the sustainable growth rate. | ||

SGR = ROE*b/(1-ROE*b), where b = retention ratio. | ||

The retention ratio = 1-29.86% = 70.14% | ||

SGR = 0.0596*0.7014/(1-0.0596*0.7014) = | 4.36% | |

Maximum growth rate possible
maintaining the D/E = |
4.36% |

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