Bulla Recording, Inc., wishes to maintain a growth rate of 12 percent per year a

Question

Bulla Recording, Inc., wishes to maintain a growth rate of 12 percent per year and a debt-equity ratio of .40. Profit margin is 5.3 percent. and the ratio of total assets to sales is constant at .75. What dividend payout ratio is necessary to achieve this growth rate under these constraints? (Negative answer should be indicated by a minus sign. Do not round intermediate calculations.) Payout ratio % What is the maximum growth rate possible? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Maximum growth rate % Is a growth rate of 12 percent possible? Possible Impossible

Explanation / Answer

Growth Rate,g = ROE * (1 - dividend payout ratio)
ROE = (net income / sales) * (sales / assets) * (assets / equity) <DuPont analysis equation

solving these in reverse order...
A/E= 1+ D/E = 1.4
sales/assets = 1/(assets/sales) = 1/0.75 = 1.3333
ROE = 0.053 * 1.3333 * 1.4 = 0.098931, or about 9.89% <something is wrong in Mudville, can't have a growth rate higher than the ROE if the capital structure and/or the Net Profit Margin stay at the constants you provided

"g" = ROE * (1 - dividend payout ratio)
let "x" stand for (1 - dividend payout ratio)...
0.12 = 0.098931 * x
x = 0.12 / 0.098931 = 1.212967 <this number should be less than 1 (b/c it represents 1 - payout ratio)

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