Seether, Inc., wishes to maintain a growth rate of 10 percent per year and a deb
ID: 2810808 • Letter: S
Question
Seether, Inc., wishes to maintain a growth rate of 10 percent per year and a debt–equity ratio of 0.3. Profit margin is 5.3 percent, and the ratio of total assets to sales is constant at 1.62.
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 sustainable growth rate possible given these constraints? (Do not round intermediate calculations and round your final answer to 2 decimal places.)
Sustainable growth rate %
Explanation / Answer
Answer a.
Equity Multiplier = 1 + Debt-equity Ratio
Equity Multiplier = 1 + 0.30
Equity Multiplier = 1.30
Total Assets Turnover = 1 / Ratio of Total assets to sales
Total Assets Turnover = 1 / 1.62
Return on Equity = Profit Margin * Total Assets Turnover * Equity Multiplier
Return on Equity = 5.30% * (1/1.62) * 1.30
Return on Equity = 4.2531%
Let retention ratio be “b”
Growth Rate = [ROE * b] / [1 - ROE * b]
0.10 = [0.042531 * b] / [1 - 0.042531 * b]
0.10 - 0.004253 * b = 0.042531 * b
0.10 = 0.046784 * b
2.14 = b
Retention Ratio = 1 - Payout Ratio
2.14 = 1 - Payout Ratio
Payout Ratio = -1.14 or -114%
Answer b.
Dividend payout ratio cannot be negative. So, dividend payout ratio is 0.00
Retention Ratio, b = 1 - Payout Ratio
Retention Ratio, b = 1 - 0
Retention Ratio, b = 1
Growth Rate = [ROE * b] / [1 - ROE * b]
Growth Rate = [0.042531 * 1] / [1 - 0.042531 * 1]
Growth Rate = 0.0444 or 4.44%