Question #27 - Reading 20 Discounted Dividend Valuation

Reading: Reading 20 Discounted Dividend Valuation

PDF File: Reading 20 Discounted Dividend Valuation.pdf

Page: 13

Status: Incorrect

Correct Answer: A

Your Answer: B

Shared Context

- Calculate the profit margin component of Jakzach's return on equity for the year 20x6. A) 8.70%. B) 10.03%. C) 19.91%.

Question

Calculate the sustainable growth rate of Jakzach on 31 December 20x6. Note: Your calculations should use 20x6 beginning-of-year balance sheet values.

Answer Choices:

A. 1%

B. 9%

C. 10%

Explanation

The sustainable growth rate of Jakzach is 9.97%, calculated as follows: g = b × ROE = earnings retention rate × ROE = (1 – payout ratio) × ROE = (1 – dividends / net income) × (net income / beginning equity) = (1 – ($3.20 / $30.16)) × ($30.16 / $270.35) = 0.0997 g = 9.97% Using DuPont model results from above and per share data provided in question: Payout ratio = $0.20 / $1.89= 10.58% ROE = 10.03% × 0.56 × 2.00 = 11.23% g = (1 – 0.1058) × 11.23% = 10.04% g = 10.04%

Actions

Practice Flashcards