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Answer :
The Grand Isle has 12,000 shares of stock outstanding at a market price of $31.60 per share. The book value per share is $12.08. The firm has earnings per share of $1.86 and a dividend payout ratio of .40. The firm's sustainable rate of growth is 9.24%.
The sustainable rate of growth of a company is defined as the maximum rate at which a business can grow without additional equity or debt financing while maintaining a steady level of profitability. The sustainable rate of growth is a crucial financial metric for companies because it indicates how much they can develop without relying on external financing, which can be difficult to acquire when the economy is tough.
The formula to calculate sustainable growth rate:
Sustainable Growth Rate = Earnings Retention Ratio x Return on Equity
Earnings Retention Ratio is calculated as (1 - Dividend Payout Ratio)
Return on Equity = (Net Income / Stockholder’s Equity) × 100
Now, let's calculate the sustainable growth rate:
Calculation of Earnings Retention Ratio = (1 - Dividend Payout Ratio)
Earnings Retention Ratio = (1 - 0.40)
= 0.60
Calculation of Return on Equity = (Net Income / Stockholder’s Equity) × 100
Stockholder’s Equity = Book Value per share x No of shares
Stockholder’s Equity = $21.08 x 12,000
= $252,960
Net Income = Earnings Per Share x No of shares
Net Income = $3.34 x 12,000
= $40,080
Return on Equity = (Net Income / Stockholder’s Equity) × 100
Return on Equity = ($40,080 / $252,960) × 100
Return on Equity = 15.85%
Sustainable Growth Rate = Earnings Retention Ratio x Return on Equity
Sustainable Growth Rate = 0.60 x 15.85%
Sustainable Growth Rate = 9.24%
Therefore, the firm's sustainable rate of growth is 9.24%.
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