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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
I 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.
Sorry 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 🙂
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