1. Synyster Corp. has an ROE of 14 percent and a payout ratio of 22 percent. Wha
ID: 2808431 • Letter: 1
Question
1.
Synyster Corp. has an ROE of 14 percent and a payout ratio of 22 percent.
What is its sustainable growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
2.
Assets and costs are proportional to sales. The company maintains a constant 45 percent dividend payout ratio and a constant debt-equity ratio.
What is the maximum dollar increase in sales that can be sustained assuming no new equity is issued? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Synyster Corp. has an ROE of 14 percent and a payout ratio of 22 percent.
Explanation / Answer
a). g = ROE x b
= 0.14 x (1 - 0.22) = 0.14 x 0.78 = 0.1092, or 10.92%
b). The maximum percentage sales increase is the sustainable growth rate. To calculate the sustainable growth rate, we first need to calculate the ROE, which is:
ROE = NI / TE
ROE = $6,636 / $49,660
ROE = 0.1336, or 13.36%
The plowback ratio, b, is one minus the payout ratio, so:
b = 1 – 0.45 = 0.55
Now we can use the sustainable growth rate equation to get:
Sustainable growth rate = (ROE × b) / [1 – (ROE × b)]
Sustainable growth rate = [0.1336(0.55)] / [1 – 0.1336(0.55)]
Sustainable growth rate = 0.0735 / 0.9265 = 0.0793, or 7.93%
So, the maximum dollar increase in sales is:
Maximum increase in sales = $44,450(0.0892)
Maximum increase in sales = $3,526.04
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