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ABC Company wishes to maintain sales growth of 14% per year and a debt/equity ratio of 0.30. The profit margin is 6.2% and the ratio of total assets to sales is constant at 1.55. What dividend payout ratio should Bulla choose to achieve 14% sales growth? Is this dividend payout ratio possible?

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hyderali230

Answer:

Bulla should choose to achieve 41% of dividend payout ratio with this growth.

Explanation:

Debt to Equity ratio = 0.3

Debt / Equity = 0.3

As we know the debt ratio to Equity is calculated when equity is considered one.

So,

Total Asset to sales = 1.55

Profit Margin ratio = 6.2%

ROE = Profit Margin x Total Assets to sales ratio

ROE = 6.2% x 1.55

ROE = 0.0961

Sustainable Growth rate = (ROE * Retention Ratio)/(1 - ROE*Retention Ratio)

14% = ( 0.0961 x retention rate) / ( 1 - retention rate)

0.14 x ( 1 - retention rate) = 0.0961 x retention rate

0.14 - 0.14 retention rate = 0.0961 retention rate

0.14 = 0.0961 retention rate + 0.14 retention rate

0.14 = 0.2361 retention rate

Retention rate = 0.14 / 0.2361

Retention rate = 0.5930

Retention rate = 59.30%

Payout ratio = 100% - 59.3% = 40.7%

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