Question

High Flyer, Inc., wishes to maintain a growth rate of 13.75 percent per year and a debt–equity ratio of .45. The profit margin is 4.7 percent, and total asset turnover is constant at 1.17.
  
What is the dividend payout ratio? (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.)
  
Dividend payout ratio             %
  
What is the maximum sustainable growth rate for this company? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  
Sustainable growth rate             %

Answer 1

Information provided:

Sustainable growth rate= 13.75%

Asset turnover ratio= 1.17

Debt equity ratio= 0.45

Profit margin= 4.7%

a.The question is solved by first computing the return on equity.

ROE is calculated using the below formula:

ROE= Asset turnover ratio* Profit margin*Asset equity ratio

        = 1.17*4.7*(1 + 0.45)

        = 7.9736   7.97%

b.The dividend payout ratio is calculated using the formula fro sustainable growth rate.

Sustainable growth rate= ROE*(1 – dividend payout ratio)

13.75%= 7.97%*(1 - dividend payout ratio)

dividend payout ratio= 1 – (13.75%/ 7.97%)

                                        = 1 – 1.73

                                          = -73%.

b.Since the minimum dividend payout ratio is 0, it is impossible to sustain the growth rate the firm wishes to have.

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