Question

Sig, Inc., wishes to maintain a growth rate of 10 percent per year and a debt-equity ratio of .5. The profit margin is 4.8 percent, and the ratio of total assets to sales is constant at 1.65 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 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.) Sustainable growth rate %

Answer 1

Answer a.

Equity Multiplier = 1 + Debt-Equity Ratio
Equity Multiplier = 1 + 0.50
Equity Multiplier = 1.50

Total Asset Turnover = 1 / Ratio of Total Assets to Sales
Total Asset Turnover = 1 / 1.65
Total Asset Turnover = 0.6061

Return on Equity = Profit Margin * Total Asset Turnover * Equity Multiplier
Return on Equity = 4.80% * 0.6061 * 1.50
Return on Equity = 4.3639%

Sustainable Growth Rate = [Return on Equity * Retention Ratio] / [1 - Return on Equity * Retention Ratio]
0.10 = [0.043639 * Retention Ratio] / [1 - 0.043639 * Retention Ratio]
0.10 - 0.0043639 * Retention Ratio = 0.043639 * Retention Ratio
0.10 = 0.0480029 * Retention Ratio
Retention Ratio = 2.0832 or 208.32%

Payout Ratio = 1 - Retention Ratio
Payout Ratio = 1 - 2.0832
Payout Ratio = -1.0832 or -108.32%

Answer b.

No, this growth rate is not possible as payout ratio cannot be negative.

Answer c.

Maximum growth rate is possible if payout ratio is 0.00%

Retention Ratio = 1 - Payout Ratio
Retention Ratio = 1 - 0.00
Retention Ratio = 1.00

Sustainable Growth Rate = [Return on Equity * Retention Ratio] / [1 - Return on Equity * Retention Ratio]
Sustainable Growth Rate = [0.043639 * 1.00] / [1 - 0.043639 * 1.00]
Sustainable Growth Rate = 0.043639 / 0.956361
Sustainable Growth Rate = 0.0456 or 4.56%