Question

General Electric (GE) has earnings per share of $2.98 and dividends per share of $0.35. Its return on assets (ROA) is 14.6% and its return on equity (ROE) is 18.2%. What is its sustainable rate of growth?

Answer 1

g = 0.1606 or 16.06%

Step-by-step explanation:

The sustainable growth rate is the growth rate in earning or dividends of a stock that will remain constant in the long run. Such a rate is calculate for an indefinite period of time. The formula to calculate the sustainable growth rate is,

g = RR * ROE

Where,

• RR is the retention ratio or (1 - dividend payout ratio)
• ROE is the return on equity

The dividend per share as a percentage of earnings per share will give us the dividend payout ratio.

Dividend payout ratio = 0.35 / 2.98 = 0.1174 or 11.74%

g = (1 - 11.74%) * 18.2%

g = 0.1606 or 16.06%