Question #90 - Reading 20 Discounted Dividend Valuation

Reading: Reading 20 Discounted Dividend Valuation

PDF File: Reading 20 Discounted Dividend Valuation.pdf

Page: 35

Status: Unattempted

Shared Context

- With respect to their statements about the use of the GGM and the H-model: A) only Moskowitz is correct. B) only Sharpless is correct. C) both are correct.

Question

Based on the forecast data in Table 3, Flyaweight's sustainable growth rate (SGR) is closest to which value? If asset turnover were to rise from the forecast level, what would be the impact on SGR? SGR Impact on SGR

Answer Choices:

A. 22% Increase

B. 22% Decline

C. 24% Increase

Explanation

Note that total assets for the firm must equal total liabilities plus owners' equity, so assets are ($14.40 + $12.70) = $27.10. Thus the Return on Equity (ROE) of the firm equals: ROE = profit margin × asset turnover × financial leverage ROE = (0.29) × ($10.70 / $27.10) × ($27.10 / $12.70) ROE = 0.244 = 24.4% ROE will rise as asset turnover rises. The SGR of the firm equals: SGR = retention rate × ROE SGR = (1 – 0.10) × 0.244 SGR = 0.90 × 0.244 SGR = 0.22 The SGR of the firm is approximately 22%. SGR will increase as rising asset turnover increases ROE.

Actions

Practice Flashcards