Web Cites Research projects a rate of return of 20% on new projects. Management plans to plow back 30% of all earnings into the firm. Earnings this year will be $3 per share, and investors expect a 12% rate of return on stocks facing the same risks as Web Cites. a. What is the sustainable growth rate

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ewomazinoade ewomazinoade · Answer 1 · 2021-05-11T20:26:09+02:00

Answer:

6%

Explanation:

Sustainable growth rate is the rate of growth a company can afford in the long term

Sustainable growth rate (g) = b x ROE

b = retention rate. It is the portion of earnings that is not paid out as dividends = 30%

ROE = return on equity = 20%

Return on equity is an example of a profitability ratio.

Profitability ratios measure the ability of a firm to generate profits from its asset

g = 0.3 x 0.2 = 0.06 = 6%

abiolataiwo2015 abiolataiwo2015 · Answer 2 · 2021-11-30T12:39:06+01:00

Based on the information given the sustainable growth rate is 6%.

Using this formula

Sustainable growth rate= ROE × Plowback ratio

Where:

ROE=20%

Plowback ratio=30%

Let plug in the formula

Sustainable growth rate = 0.20 × 0.30

Sustainable growth rate=0.06×100

Sustainable growth rate= 6.00%

Inconclusions the sustainable growth rate is 6%.

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