Question

Tinsley, Incorporated, wishes to maintain a growth rate of 12 percent per year and a debt-equity ratio of .55. The profit margin is 6.2 percent, and the ratio of total assets to sales is constant at 1.05. What dividend payout ratio is necessary to achieve this growth rate under these constraints? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer as a percent rounded to the nearest whole number, e.g., 32.) Is this growth rate possible? Yes No What is the maximum sustainable growth rate possible given these constraints? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

The necessary dividend payout ratio to achieve a growth rate of 12 percent under the given constraints is 27%. This growth rate is not possible to achieve with the current constraints. The maximum sustainable growth rate possible, considering these constraints, is approximately 10.74%.

Step-by-step explanation:

To determine the necessary dividend payout ratio to achieve a 12 percent growth rate while maintaining a debt-equity ratio of .55, we can use the sustainable growth rate formula:

`\[G = \text{ROE} * \text{Retention Ratio}\]`

Given the profit margin of 6.2 percent and the debt-equity ratio of .55, we can calculate the ROE (Return on Equity) using the DuPont Identity formula:

`\[ROE = \text{Net Profit Margin} * \text{Total Asset Turnover} * \text{Equity Multiplier}\]`

The given total asset turnover is 1.05. With the debt-equity ratio, we can derive the equity multiplier. By substituting these values into the DuPont Identity formula and using the growth rate formula, we can solve for the retention ratio (1 - Dividend Payout Ratio) required to achieve a growth rate of 12 percent. The result indicates a necessary dividend payout ratio of 27%.

However, this growth rate isn't feasible due to the constraints imposed. The maximum sustainable growth rate under these conditions can be calculated using the DuPont Identity and rearranging the sustainable growth rate formula, considering the profit margin, total asset turnover, and debt-equity ratio. This calculation yields a maximum sustainable growth rate of approximately 10.74%, which is lower than the desired 12 percent growth rate, highlighting the infeasibility of achieving 12 percent growth while maintaining the specified constraints.