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9 January, 06:19

Western Adventures has earnings per share of $2.30 and dividends per share of $1.25. The total equity of the firm is $850,000. There are 40,000 shares of stock outstanding. What is the sustainable rate of growth?

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  1. 9 January, 06:35
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    4.94%

    Explanation:

    The computation of the sustainable rate of growth is shown below:

    Sustainable rate of growth = Return on equity * (1 - dividend payout ratio)

    where,

    Return on equity is

    = Net income : equity

    The net income is

    Earning per share = Net income : Number of stock outstanding

    $2.30 = Net income : 40,000 shares

    So, the net income is $92,000

    So, the return on equity is

    = $92,000 : $850,000

    = 10.82%

    And, the dividend payout ratio is

    = Dividend : net income

    = $1.25 * 40,000 shares : $92,000

    = 54.35%

    So, the sustainable rate of growth is

    = 10.82% * (1 - 54.35%)

    = 10.82% * 45.65%

    = 4.94%
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