The market value and book value of Visual Image Inc.'s outstanding 2 million common shares are $60 million and $30 million, respectively.The company's recent net profit was $3,500,000.What is the company's sustainable dividend growth rate if it uses a dividend payout ratio of 60.0%?

Question

Quizplus · Accepted Answer

The dividend payout ratio is 60.0%, which means 60.0% of net profit will be paid as dividends.

Therefore, the total amount of dividends paid will be:

Dividends = Net profit x Dividend payout ratio = $3,500,000 x 0.60 = $2,100,000

The sustainable dividend growth rate can be calculated using the following formula:

Sustainable dividend growth rate = (Net profit - Dividends) / Book value

Sustainable dividend growth rate = ($3,500,000 - $2,100,000) / $30,000,000 = 0.0467 = 4.67%

Therefore, the best choice is C.

The Market Value and Book Value of Visual Image Inc