Hi john,
The answer says that as the historical earnings growth rate of 12% is greater than the cost of capital (8%) then the growth rate is not sustainable.
Could you kindly explain how the examiner has come to this conclusion please?
Thank you
Mercury Training June 08
10y ago#1I am away from home at the moment and I cannot therefore look at the question.
I get back late tonight so please ask again later (so I don't forget :-) ) and I will answer when I get home.
Thank you John I look forward to your response
10y ago#3Sorry for the delay, but I am home now :-)
It is simply that if the company is growing that fast, then shareholders are going to want a higher return on their investment.
If you invested in my company and the earnings were to double in size, then I think you would expect to get a bigger return :-)
Thank you John,
10y ago#5You are welcome :-)