Question

Canadian Adventures has earnings per share of $2.86 and dividends per share of $1.80. The total...

Canadian Adventures has earnings per share of $2.86 and dividends per share of $1.80. The total equity of the firm is $750,000. There are 38,000 shares of stock outstanding. What is the sustainable rate of growth?

Homework Answers

Answer #1

Net Income = Earning Per Share * Total Shares Outstanding

= $ 2.86 * 38,000 Shares

= $ 108,680

ROE = Net Income / Total Equity

= $ 108,680 /$ 750,000

= 0.144906666

Payout Ratio = Dividend Per Share / Earnings Per Share

= $ 1.80 / $ 2.86 *100

= 62.93706294%

Hence, Retention Ratio = 1 - Payout Ratio

= 1-62.93706294%

=37.06293706%

Sustainable growth rate = ( ROE * Retention Ratio)/ [ 1- ( ROE*Retention Ratio)]

= ( 0.144906666 * 37.06293706%) / [ 1-( 0.144906666 * 37.06293706%)]

= 5.68%

Hence the correct answer is 5.68%

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