Question #92
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 36
Status: Unattempted
Question
If a firm has a return on equity of 15%, a current dividend of $1.00, and a sustainable growth rate of 9%, what are the firm's current earnings?
Answer Choices:
A. $1.75
B. $2.50
C. $1.50
Explanation
The earnings can be determined by solving for earnings in the sustainable growth formula:
9% = [1 − ($1 / $Earnings)] × 0.15 or $1 / 0.4 = $Earnings = $2.50