Question

Table below contains information on the historic earnings per share (EPS) and dividend per share (DPS) for the company. Using the information in the table, calculate the expected dividend growth rate of the company. Answer in the box provided .

(A) Historical growth rate

PER SHARE DATA	EPS	Dividend
Y2016	2.42	1.52
Y2015	2.55	1.52
Y2014	2.06	1.52
Y2013	2.46	1.37
Y2012	2.00	1.12

(B)   Sustainable Growth Rate for 2016

Assuming that the Return on Equity (ROE) for Flight Centre is 18.7% for the year 2016, calculate what is sustainable growth rate of the company? Answer in the box provided.

Answer 1

A.)

PER SHARE DATA	EPS	Dividend	Dividend Growth rate
Y2016	2.42	1.52	-
Y2015	2.55	1.52	0% (1.52÷1.52)-1
Y2014	2.06	1.52	0% (1.52÷1.52)-1
Y2013	2.46	1.37	-9.87% (1.37÷1.52)-1
Y2012	2.00	1.12	-18.25% (1.12÷1.37)-1

The expected dividend growth rate calculated using the historical dividend growth rate is as follows:

The expected dividend growth rate of the company = Arithmetic average of historical dividend growth rate

= (0+0-9.87-18.25)÷4

= -28.12 ÷ 4

= -7.03%

B.) Sustainable Growth Rate for 2016

sustainable growth rate = ROE × (1- Dividend payout ratio)

Here,

ROE = 18.7%

Dividend payout ratio = Dividend per share ÷ EPS

= 1.52 ÷ 2.42

=62.8%

Therefore,

sustainable growth rate = 18.7% × (1 - .628)

= 18.7% × .372

= 6.96%