Shinedown, Inc., wishes to maintain a growth rate of 10 percent per year and a d

Question

Shinedown, Inc., wishes to maintain a growth rate of 10 percent per year and a debt–equity ratio of .3. Profit margin is 5.3 percent, and the ratio of total assets to sales is constant at 1.62.

a. What dividend payout ratio is necessary to achieve this growth rate under these constraints?

b. What is the maximum growth rate possible?

Shinedown, Inc., wishes to maintain a growth rate of 10 percent per year and a debt–equity ratio of .3. Profit margin is 5.3 percent, and the ratio of total assets to sales is constant at 1.62.

Explanation / Answer

Step 1: Calculation of ROE

Profit margin = Net Income / Net Sales = .053

Net Sales = Net Income /.053

Net Sales / Total assets = 1.62
Total assets = Net Sales / 1.62

= Net Income /(.053*1.62)

Total assets = Net Income /.08586

Debt/Equity = .3

(Total assets - Equity)/Equity =.3

Total assets - Equity = .3 equity

Total assets = .3 equity + Equity

1.3 equity = Total assets

Equity = Total assets/1.3

Net Income /(.08586*1.3)

Equity = Net Income /.111618

Return on Equity = Net Income/Shareholder's Equity

= Net Income/ (Net Income /.111618)

= 1/.111618

= 8.96%

Sustainable growth rate = ROE*(1-payout ratio)

10 = 8.96 * (1-payout ratio)

1-payout ratio = 10/8.96 = 1.12

Payout ratio = 1-1.12 =- .12 = -12%

-12% Payout ratio is not possible. it is impossible to achieve this growth rate under these constraints.

b. What is the maximum growth rate possible?

The maximum growth rate is possible when payout is 0%. AT 0% payout ie; 100% retention ratio

Sustainable growth rate = ROE = 8.96%

c. Is a growth rate of 10 percent possible?

As we already discussed it is not possible to have a growth rate of 10%

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