Question

Suppose that instead of plowing money back into lucrative ventures, Aqua America’s management is investing at an expected return on equity of 5%, which is below the return of 7.8% that investors could expect to get from comparable securities. a. Find the sustainable growth rate of dividends and earnings in these circum- stances. Continue to assume a 40% plowback ratio. b. Find the new value of its investment opportunities. Explain why this value is negative despite the positive growth rate of earnings and dividends. c. If you were a corporate raider, would Aqua America be a good candidate for an attempted takeover?

Answer 1

a. Sustainable growth rate formula is g = b * r , where b is retention ratio g = 0.4 * 5 = 2 %

b . New value cannot be calculated , since old value is not mentioned

c. No , Aqua america is not good to takeover as it is providing lower return .

Step-by-step explanation: