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Cost of equity and earnings growth

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Cost of equity and earnings growth

Viewing 4 posts - 1 through 4 (of 4 total)
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  • February 13, 2020 at 11:56 am #561658
    xanpech
    Member
    • Topics: 14
    • Replies: 52
    • ☆☆

    Hello,

    I read in a written answer it saying that because the companies historical earnings growth rate was greater than the cost of equity capital this meant the earnings can’t be sustained in the long run.

    I was just wondering why this was? Is it because investors would want more dividends?

    Thanks,
    Alex

    February 13, 2020 at 4:02 pm #561685
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54696
    • ☆☆☆☆☆

    This would not necessarily be the case and depends on the circumstances in the question.

    If the answer you are referring to is for a past exam question or a question in the BPP Revision Kit, then say which question it is and then I will be able to answer you properly 🙂

    February 13, 2020 at 8:45 pm #561742
    xanpech
    Member
    • Topics: 14
    • Replies: 52
    • ☆☆

    Thanks for this. The question is from an older BPP revision kit for sept 16 – June 17. It’s q.38 Mercury Training (06/08), and the answer is from the section B part.

    February 14, 2020 at 9:11 am #561798
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54696
    • ☆☆☆☆☆

    It is only in the very long run that it would not be sustainable, because in the very long run shareholders would indeed require a higher rate of return.

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