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?

4.94%

Explanation:

The computation of the sustainable rate of growth is shown below:

Sustainable rate of growth = Return on equity × (1 - dividend payout ratio)

where,

Return on equity is

= Net income ÷ equity

The net income is

Earning per share = Net income ÷ Number of stock outstanding

$2.30 = Net income ÷ 40,000 shares

So, the net income is $92,000

So, the return on equity is

= $92,000 ÷ $850,000

= 10.82%

And, the dividend payout ratio is

= Dividend ÷ net income

= $1.25 × 40,000 shares ÷ $92,000

= 54.35%

So, the sustainable rate of growth is

= 10.82% × (1 - 54.35%)

= 10.82% × 45.65%

= 4.94%