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**

Feel free to ask in case of any query relating to this question

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