Web Cites Research projects a rate of return of 20% on new projects. Management plans to plow back 30% of all earnings into the firm. Earnings this year will be $3 per share, and investors expect a 12% rate of return on stocks facing the same risks as Web Cites.

Question

Geovanni Turner

Business

11 March, 06:01

Web Cites Research projects a rate of return of 20% on new projects. Management plans to plow back 30% of all earnings into the firm. Earnings this year will be $3 per share, and investors expect a 12% rate of return on stocks facing the same risks as Web Cites.

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Answers (1)

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Nia Elliott · Answer 1

This question is incomplete. However, with the available information, you can calculate sustainable growth rate.

Explanation:

Sustainable growth rate (SGR) is the rate at which the firm can grow using internally generated funds. The formula for SGR is as follows;

SGR = ROE * b

whereby ROE = return on earnings = 20% or 0.20 as a decimal

b = retention rate or plow back ratio = 30% or 0.30 as a decimal

SGR = 0.20 * 0.30 = 0.06

Therefore, sustainable growth rate as a percentage is 6%