Question

Wilt's has earnings per share of $3.98 and dividends per share of $1.35. What is the firm's sustainable rate of growth if its return on assets is 14.6% and its return on equity is 12.2%?

Answer 1

Answer: 8.05%

Explanation:

Given that,

Earnings per share (EPS) = $3.98

Dividends per share(DPS) = $1.35

Return on assets(ROA) = 14.6%

Return on equity(ROE) = 12.2%

Plowback Ratio = $\frac{EPS - DPS}{EPS}$

                          = $\frac{3.98 - 1.35}{3.98}$

                          = 0.66

Therefore,

sustainable rate of growth = ROE × Plowback Ratio

                                            = 12.2% × 0.66

                                            = 0.0805

                                            = 8.05%