Question

A firm wants a sustainable growth rate of 3.63 percent while maintaining a 37 percent dividend payout ratio and a profit margin of 6 percent. The firm has a capital intensity ratio of 2. What is the debt-equity ratio that is required to achieve the firm's desired rate of growth?

Answer 1

To achieve the firm's desired sustainable growth rate, we need to calculate the debt-equity ratio using the given parameters. However, it is not possible to achieve the desired growth rate with the given parameters.

Step-by-step explanation:

To calculate the debt-equity ratio required to achieve the firm's desired sustainable growth rate, we need to use the formula:

Debt-Equity Ratio = (Sustainable Growth Rate - (Profit Margin \times Retention Ratio)) / (Retention Ratio \times Capital Intensity Ratio)

Given that the sustainable growth rate is 3.63%, the profit margin is 6%, the dividend payout ratio is 37%, and the capital intensity ratio is 2, we can substitute these values into the formula to calculate the debt-equity ratio.

Debt-Equity Ratio = (3.63% - (6% \times (1 - 0.37))) / ((1 - 0.37) \times 2)

Debt-Equity Ratio = (3.63% - (6% \times 0.63)) / (0.63 \times 2)

Debt-Equity Ratio = (3.63% - 3.78%) / 1.26

Debt-Equity Ratio = -0.15% / 1.26

Debt-Equity Ratio = -0.00119

Since the debt-equity ratio cannot be negative, we can conclude that it is not possible to achieve the firm's desired rate of growth using the given parameters.