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