Question

BFC Ltd. has the following financial information: Net Profit: $5 million; Sales: $100 million; Total Assets: $50 million; Equity $22.73 Million; Earnings Per Share (EPS): $3.00; Dividends Per Share: $1.00. What is BFC’s return on equity and the estimated sustainable growth rate? In general, how would the growth rate and payout ratio of value firms be different from growth firms? Explain why.

Answer #1

Net profit =$5 million

Shareholder equity = $22.73 million

ROE is calculated by dividing net profit by shareholders' equity

**So ROE = $ 5 million / $ 22.73 million = 0.2199 or
22%**

Dividend per share = $1

EPS = $3

Dividend payout ratio = Dividend per share/ EPS

= 1/3 = 33.33%

Sustainable growth rate = ROE * (1-dividend payout ratio)

22%*(2/3)= **14.66%**

Growth firms have typically low or zero payout ratios As they mature, they tend to return more of the earnings back to investors and value firms have high dividend payout ratios.

Growth firms have higher growth rates compared to value firms

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