High Flyer, Inc., wishes to maintain a growth rate of 17.75 percent per year and a debt-equity...

Question:

High Flyer, Inc., wishes to maintain a growth rate of 17.75 percent per year and a debt-equity ratio of 1.25. The profit margin is 4.1 percent, and total asset turnover is constant at 1.01.

a. What is the dividend payout ratio?

b. What is the maximum sustainable growth rate for this company?

Sustainable Growth Rate:

A firm's sustainable growth rate is the rate of growth it can sustain over time without changing its current capital structure. This contrasts with the internal growth rate, which is the maximum growth rate a firm can achieve by relying only on retained earnings.

Answer and Explanation:

a. The dividend payout ratio that is consistent with the desired growth, is-82.43%.

We first compute the return on equity (ROE) for the company:

  • ROE...

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Financial Growth Rates: Types & Determinants

from Finance 101: Principles of Finance

Chapter 4 / Lesson 5
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