Answer:
4.94%
Explanation:
The computation of the sustainable rate of growth is shown below:
Sustainable rate of growth = Return on equity × (1 - dividend payout ratio)
where,
Return on equity is
= Net income ÷ equity
The net income is
Earning per share = Net income ÷ Number of stock outstanding
$2.30 = Net income ÷ 40,000 shares
So, the net income is $92,000
So, the return on equity is
= $92,000 ÷ $850,000
= 10.82%
And, the dividend payout ratio is
= Dividend ÷ net income
= $1.25 × 40,000 shares ÷ $92,000
= 54.35%
So, the sustainable rate of growth is
= 10.82% × (1 - 54.35%)
= 10.82% × 45.65%
= 4.94%
