Question

Suprenuk, Inc., wishes to maintain a growth rate of 13 percent per year and a debt-equity ratio of .3. 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 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.)

Answer 1

Here will use different ratio formula as well as Dupont analysis

To find Dividend payout ratio we sustainable growth rate formula

first lets understand the Dividend payout ratio(DPR), DPR is part of Net Income that paid to shareholder of comapy, DPR = (1- RR) / Net income

where RR = Retention rate = 1- DPR

so first let's use Sustainable Growth rate formula

Sustainable Growth rate = Retention rate * Return on equity = (1-DPR) * ROE

0.13 = (1-DPR) * 0.05449

1- DPR = 0.13/ 0.05449

1- DPR = 2.385

DPR = 1 - 2.385 = -1.385

-1.385 dividend payout ratio is necessary to achieve 13% growth rate

where Retention rate = 1- Dividend Payour rate=1-DPR

Return on equity (ROE) = Net income / Total shareholder equity

we don't have Return of equity formula but have other ratio

so here we will use Dupont analysis

Return on equity = net profit margon * assets turnover * financial leverage = 0.07 * 0.5988 * 1.3 = 0.05449 = 5.449 %

Net profit marin is given 7%

Assets turnover = sales / total asset = 1/ (total asset to sales) = 1/ 1.67 = 0.5988

Financial levrerage = Total asset / Total equity = 1.3 / 1 = 1.3

Debt to equity ratio = debt / equity= = 0.3

if debt is 0.3 and equity is 1 then debt / equity = 0.3

Total asset = Debt + quity = 1+0.3 = 1.3

Maximum Growth rate possible when there is no dividend payout that mean Retention ratio is 1

Maximum growth rate = Retention ratio * Return on equity = 1* 0.05449 = 0.05449 = 5.449%

where Retention ratio = 1

return on equity = 0.05449

SO maximum growth rate possible is 5.449% and that is equal to rerurn on equity