4 10 points You are the Financial Manager of Linkedin Inc Yo

4. (10 points) You are the Financial Manager of Linkedin Inc. You wish to maintain a growth rate of 12% per year and a debt-equity ratio of .30. Profit Margin is 5.9%, and the ratio of Total Assets to Sales is constant at.85. Is this growth rate possible?

Solution

ROE = (PM)(TAT)(EM) ROE = (.059)(1 / 0.85)(1 + 0.3) ROE = .0902 or 9.02% Sustainable growth rate = (ROE × b) / [1 – (ROE × b)] Sustainable growth rate = .12 = [.0902b] / [1 – .0902b] b = 1.19 This implies the payout ratio is: Payout ratio = 1 – b Payout ratio = 1 – 1.19 Payout ratio = –0.19 It is not possible to have a negative payout ratio. Therefore, it is not possible to grow at 12% without changing some of the constraints given in the question.