Question

Sig, Inc., wishes to maintain a growth rate of 13 percent per year and a debt-equity ratio of .3. The profit margin is 7 percent, and the ratio of total assets to sales is constant at 1.67.

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 the nearest whole number, e.g., 32.)

Payout ratio =

Is this growth rate possible ? Yes or no

  

What is the maximum sustainable growth rate possible given these constraints? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Substainable growth rate = %

Answer 1

a). Equity Multiplier = 1 + D/E Ratio = 1 + 0.3 = 1.3

ROE = Profit Margin * Total Asset Turnover * Equity Multiplier

= 7% * (1/1.67) * 1.3 = 5.45%

g = [ROE * b] / [1 - (ROE*b)]

0.13 = [0.0545 * b] / [1 - (0.0545*b)]

1 - (0.0545*b) = [0.0545*b]/0.13

1 - (0.0545*b) = 0.4192 * b

(0.4192*b) + (0.0545*b) = 1

0.4737*b = 1

b = 1/0.4737 = 2.1113 = 211.13%

Dividend Payout Ratio = 1 - b = 1 - 2.1113 = -1.1113, or -111.13%

b). No, the rate is not possible as the payout ratio can't be negative.

c). The least possible payout ratio is zero, which means retention ratio is 1.

So, Sustainable Growth Rate = [ROE * b] / [1 - (ROE*b)]

= [0.0545 * 1] / [1 - (0.0545*1)]

= 0.0545 / 0.9455 = 0.0576, or 5.76%