Western Adventures has earnings per share of $2.30 and dividends per share of $1.25. The total equity of the firm is $850,000. There are 40,000 shares of stock outstanding. What is the sustainable rate of growth?

Question

Quizplus · Accepted Answer

The sustainable rate of growth formula is (earnings per share * retention rate) / equity per share.

First, we need to find the equity per share:

equity per share = total equity / number of shares outstanding 
equity per share = $850,000 / 40,000 
equity per share = $21.25

Next, we can calculate the retention rate:

retention rate = (earnings per share - dividends per share) / earnings per share 
retention rate = ($2.30 - $1.25) / $2.30 
retention rate = 0.4565 or 45.65%

Finally, we can plug in the values to calculate the sustainable rate of growth:

sustainable rate of growth = ($2.30 * 0.4565) / $21.25 
sustainable rate of growth = 0.0494 or 4.94%

Therefore, the correct answer is C, 4.94%.

Western Adventures Has Earnings Per Share of $2