Question

Sirius Lawnmower Co. has total equity of $450 million and 150 million shares outstanding. Its ROE...

  1. Sirius Lawnmower Co. has total equity of $450 million and 150 million shares outstanding. Its ROE is 18%. Calculate the company’s EPS.

  1. Hydra Corporation has total equity of $300 million and 120 million shares outstanding. Its ROE is 20%. The EPS is 25%. Calculate the company’s dividends per share (round to the nearest penny).

  1. HighTeck has an ROE of 15%. Its earnings per share are $2.00, and its dividends per share are $0.20. Estimate HighTeck’s growth rate.

PLEASE ANSWER IN TEXT FORM AND NOT IN PICTURE REPLY!

Homework Answers

Answer #1

(1)

ROE = Net income / Equity

0.18 = Net income / $450 million

Net income = $450 million x 0.18 = $81 million

EPS = Net income / Shares outstanding = $81 million / 150 million = $0.54

(2)

Net income = Equity x ROE = $300 million x 20% = $60 million

EPS = (Net income - Preferred dividend) / Shares outstanding

0.25 = (60 million - Preferred dividend) / 120 million

60 million - Preferred dividend = 30 million

Preferred dividend = $30 million

Dividend per share (DPS) = Preferred dividend / Shares outstanding = $30 million / 120 million = $0.25

(3)

Payout ratio = DPS / EPS = $0.2 / $2 = 0.1

Retention ratio = 1 - Payout ratio = 1 - 0.1 = 0.9

Growth rate = ROE x Retention ratio = 0.15 x 0.9 = 0.135 = 13.5%

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