Seether, Inc., wishes to maintain a growth rate of 14 percent per year and a deb
ID: 2758895 • Letter: S
Question
Seether, Inc., wishes to maintain a growth rate of 14 percent per year and a debt–equity ratio of 0.4. Profit margin is 6.7 percent, and the ratio of total assets to sales is constant at 1.64.
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.)
Seether, Inc., wishes to maintain a growth rate of 14 percent per year and a debt–equity ratio of 0.4. Profit margin is 6.7 percent, and the ratio of total assets to sales is constant at 1.64.
Explanation / Answer
Debt-to-Equity Ratio = Total Debt / Total Equity=0.4/1
Debt=0.40
Equity =1
Total Assets = Debt + Equity=0.40 +1.00=1.40
ROE = Profit Margin x Total Asset Turnover x Leverage Factor
Profit Margin =6.7
Total Asset Turnover=1.64
ROE = (Net Income/Revenues) x (Revenues/Total Assets) x (Total Assets/ Shareholders'Equity)
=6.7 x 1.64 x 1.4
=15.38
Sustainable-growth rate = ROE x (1 - dividend-payout ratio)
0.14= 0.1538 x (1- dividend-payout ratio)
0.14/0.1538=(1- dividend-payout ratio)
9.102730819 =1- dividend-payout ratio
1- dividend-payout ratio =0.0910
dividend-payout ratio=1-0.0910=0.909