Question

Walter Inc. had net income of $350,000, debt-equity ratio of 0.5, book value of assets of $5 million, and 100,000 common shares outstanding. The company just paid a dividend per share of $2. What is Walter’s estimated growth rate?

Answer 1

Answer:

EPS = Net Income / No. of Shares Outstanding
EPS = $350,000 / 100,000
EPS = $3.5

Payout Ratio = Dividend per share / EPS
Payout Ratio = $2 / $3.5
Payout Ratio = 0.5714

Retention Ratio = 1 - Payout Ratio
Retention Ratio = 1 - 0.5714
Retention Ratio = 0.4286

Equity Multiplier = 1 + Debt Equity Ratio
Equity Multiplier = 1 + 0.5
Equity Multiplier = 1.5

Equity Multiplier = Total Assets / Equity
1.5 = $5,000,000 / Equity
Equity = $5,000,000 / 1.5
Equity = $3,333,333.33

Return on Equity = Net Income / Equity
Return on Equity = $350,000 / $3,333,333.33
Return on Equity = 0.1050 or 10.50%

Growth Rate = Return on Equity * Retention Ratio
Growth Rate = 10.50% * 0.4286
Growth Rate = 4.50%