Question #114
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 45
Status: Unattempted
Correct Answer: B
Question
Which of the following is NOT a component of the sustainable growth rate formula using the DuPont model?
Answer Choices:
A. EBIT/interest expense
B. Net income/sales
C. Earnings retention ratio
Explanation
SGR = b × ROE
where:
b = earnings retention rate = (1 − dividend payout rate)
ROE = return on equity
The SGR is important because it tells us how quickly a firm can grow with internally
generated funds. A firm's rate of growth is a function of both its earnings retention and its
return on equity. ROE can be estimated with the DuPont formula, which presents the
relationship between margin, sales, and leverage as determinants of ROE. In the 3-part
version of the DuPont model: ROE = (NI/sales)(sales/assets)(assets/equity)