Question

Suprenuk, Inc., wishes to maintain a growth rate of 11 percent per year and a debt-equity ratio of .2. Profit margin is 5.9 percent and the ratio of total assets to sales is constant at 1.56.

  

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? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Is a growth rate of 11 percent possible?

Possible Impossible

Answer 1

We can calculate the desired result as follows:

A) Dividend Payout ratio

Dividend Payout ratio = 1 - rentention rate

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

ROE = (Profit margin) * (Total asset turnover) * (Equity multiplier)

= 5.90% * 1.56 * (1 + 0.20)

= 0.059 * 1.56 * 1.20

ROE = 0.110448 or 11.0448%

Sustainable growth rate = 11%

Using the above formula to calculate retention rate (b)

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

11% = (11.0448% * b) / (1 - [11.0448% * b] )

11% * (1 - [11.0448% * b] ) = (11.0448% * b)

11% - 1.214928% b = 11.0448% b

11% = 11.0448% b + 1.214928% b

12.259728% b = 11%

b = 11% / 12.259728%

b = 0.897246 or 89.7246%

Dividend Payout ratio = 1 - 89.7246%

= 10.275%

Dividend payout ratio necessary to achieve this growth rate under these constraints is 10.275%

B) Maximum growth rate possible is as follows:

The lowest possible dividend payout rate can be zero, which corresponds to a retention ratio of 1

So, the maximum sustainable growth rate for this company is:

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

= (11.0448% * 1) / (1 - [11.0448% * 1] )

= (11.0448%) / (1 - 11.0448%)

= 11.0448% / 89.9592%

= 12.42%

C) Yes the growth rate of 11% is possible

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