Question

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?

		2.14 percent
		3.31 percent
		4.94 percent
		5.37 percent
		6.59 percent

Answer 1

The growth rate is computed as shown below:

= return on equity x (1 - dividend payout ratio)

return on equity is computed as follows:

= Net income / Equity

Net income is computed as follows:

= Earnings per share x number of shares outstanding

= $ 2.86 x 38,000

= $ 108,680

So, the ROE will be computed as follows:

= $ 108,680 / $ 750,000

= 0.144906667

dividend payout ratio is computed as follows:

= (Dividend per share x number of shares outstanding) / Net income

= ($ 1.80 x 38,000) / 108,680

= 0.629370629

So, the growth rate will be computed as follows:

= 0.144906667 x (1 - 0.629370629)

= 5.37% Approximately

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