Originally posted in Equity Research but didn't get any bites.
I was given a question on an exam that asked to calculate the annual growth rate using the follow information:
Annual dividend = .75cents
EPS = $3
P/E = 13
RoE = 22%
Couldn't figure this out. Any idea? Thanks in advance.
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Sustainable Growth Rate = ROE * (1-Dividend Payout Ratio) = 22% * (1-(.75/3)) = 16.5%
Note: 1-Dividend Payout Ratio = Retention Ratio
This assumes future investment prospects generate same ROE as base ROE which is complete clown assumption:
1. Base ROE has all sorts of accounting nonsense in it
2. Prospects change over time
Thanks. Formula was never provided in class
Which uni?
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