Question

Sig, Inc., wishes to maintain a growth rate of 14 percent per year and a debt-equity ratio of .4. The profit margin is 6.7 percent, and the ratio of total assets to sales is constant at 1.64.

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.)

Is this growth rate possible?

• Yes

• 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.)

   

Answer 1

Answer-

Sig, Inc.

Given

Profit margin = 6.7 %
Total assets / sales = 1.64
debt / equity = 0.4

Profit margin = Net income / sales = 6.7 %

Sales / assets = 1 / 1.64 = 0.61

debt / equity = 0.4 / 1.0

Assets / equity = ( debt + equity ) / equity = (0.4 + 1.0) / 1.0 = 1.4

ROE = (Net income / sales) x (sales / assets) x (assets / equity)

ROE = 6.7 % x 0.61 x 1.4

ROE = 5.722 %

required to maintain a growth rate of g = 14 %

Dividend payout ratio that is necessary to maintain the growth rate of 14 %.

We know that

g = b x ROE

b = retention rate

Substituting the values of g and ROE we get

14 % = b x 5.722 %

b = 14 % / 5.722 %

b = 2.45

This growth rate of 14 % is not sustainable as the retention rate b cannot exceed 1 ( here it is 2.45 )

Therefore this growth rate is not possible

The maximum sustainable growth rate possible given these constraints

The maximum growth rate that can be acheived when the retention rate b = 1

Therefore g = b x ROE
g = 1 x 5.722 %

g = 5.722 %

Therefore the maximum growth rate that can be acheived = g = ROE = 5.722 %