Question

5. 2.00 points Problem 3-26 Constraints on Growth Shinedown, Inc., wishes to maintain a growth rate of 12 percent per year and a debt-equity ratio of 6. Profit margin is 4.9 percent, and the ratio of total assets to sales is constant at 1.66. What dividend payout ratio is necessary to achieve this growth rate under these constraints ? (Do not be surprised of your answer is negative. 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, 0.9.. 32.16.) Payout ratio 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.) Maximum growth rate Is a growth rate of 12 percent possible? Possible Impossible

Answer 1

1. Dividend Payout ratio
Dividend Payout ratio = 1-rentention rate(b)
Sustainable growth rate= [(ROE)(b)] / [1 – (ROE)(b)]
ROE =(Profit margin)(Total asset turnover)(Equity multiplier)
ROE = (0.049)(1.66)(1 + 0.6)
ROE = 0.13 or 13.01%

Sustainable growth rate= 12% or 0.12
So, putting values in formula of sustainable growth rate we will find value of b
0.12 = [0.13(b)] / [1 – 0.13(b)]
0.12 = 0.13b / 1-0.13b
0.12 (1-0.13b) = 0.13b
0.12 - 0.0156b = 0.13b
0.12 = 0.13b + 0.0156b
0.12 = 0.1456b
b = 0.12/0.1456
b = 0.824

So, the dividend payout ratio = 1 – b
= 1 – 0.824
Dividend Payout ratio= 0.1758 or 17.58%
Dividend payout ratio necessary to achieve this growth rate under these constraints is 17.58%

2. Maximum growth rate possible
The lowest possible dividend payout rate is zero, which corresponds to a retention ratio of one.

The maximum sustainable growth rate for this company is:
Sustainable growth rate= [(ROE)(b)] / [1 – (ROE)(b)]
Sustainable growth rate= [0.13(1)] / [1 – 0.13(1)]
= 0.13 / 0.87
Sustainable growth rate= 0.1494 or 14.94%

3. Possible

Yes, growth rate of 12% is possible as dividend payout ratio is positive.