Question #106 - Reading 21 Free Cash Flow Valuation

Reading: Reading 21 Free Cash Flow Valuation

PDF File: Reading 21 Free Cash Flow Valuation.pdf

Page: 53

Status: Unattempted

Shared Context

- Using the three components of the DuPont system, and using opening balance sheet values, which of the following statements regarding 20x5 is correct? A) Total asset turnover is 0.556, financial leverage is 2.07, and ROE is 11.5%. B) Total asset turnover is 1.798, financial leverage is 2.07, and ROE is 11.5%. C) Total asset turnover is 0.556, financial leverage is 0.483, and ROE is 11.5%.

Question

Assuming an ROE on 11.5%, which of the following is the best estimate of the sustainable growth rate for Busicomb Inc.?

Answer Choices:

A. 10.1%

B. 8.7%

C. 11.5%

Explanation

Sustainable growth rate: g = ROE × earnings retention rate g = 11.54% × (1 – (17.6 / 72.4)) = 11.54% × 0.757 = 8.736%

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