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?
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%
Get Answers For Free
Most questions answered within 1 hours.