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? (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.)

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%