Question

Problem 4-29 Constraints on Growth [LO3) Sig. Inc., wishes to maintain a grovth rate of 11 percent per year and a debt-equity ratio of 2. The 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 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

a.
Sustainable growth rate	(ROE*b)/(1-[(ROE)(b)])
ROE	Profit margin*Total asset turnover*Equity multiplier
ROE	0.059*1.56*(1+0.20)
ROE	0.059*1.56*1.20
ROE	11.04%
Sustainable growth rate	(16.13%*b)/(1-[16.13%*b])
11%	(11.04%*b)/(1-[11.04%*b])
11%*(1-[11.04%b])	11.04%*b
11%-1.214928%	11.04%*b
11%	9.82987200%	b
b	11%/9.82987
b	1.1190
Payout ratio	1-b
Payout ratio	1-1.1190
Payout ratio	-12%
The dividend payout ratio of -12% is not possible and thus the growth rate is not possible
Thus, this growth rate is not possible
In this constraint the lowest payout ratio possible is zero and thus retention ratio would be 100%
Calculation of maximum sustainable growth rate
Sustainable growth rate	(11.04%*1)/(1-(11.04%*1))
Sustainable growth rate	11.04%/(1-11.04%)
Sustainable growth rate	12.42%
Thus, maximum sustainable growth rate possible is 12.42%