Reading 40: Discounted Dividend Valuation-LOS o, (Part 2) 习 class, div, expression, return, center

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Session 11: Equity Valuation: Industry and Company Analysis in a Global Context
Reading 40: Discounted Dividend Valuation

LOS o, (Part 2): Demonstrate the use of the DuPont analysis of return on equity in conjunction with the sustainable growth rate expression.

 

 

 

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?

A) $1.50.

B) $1.75.

C) $2.50.

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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

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Supergro has current dividends of $1, current earnings of $3, and a sustainable growth rate of 10%. What is Supergro’s return on equity?

A) 12%.

B) 15%.

C) 20%.

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The ROE for Supergro can be determined by solving for ROE in the sustainable growth formula:

ROE = 10% / [1 – ($1/$3)] = 15%

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If Cantel, Inc., has current earnings of $17, dividends of $3.50, and a sustainable growth rate of 11%, what is its return on equity (ROE)?

A) 13.85%.

B) 17.64%.

C) 11.91%.

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Cantel’s ROE is 13.85%:

ROE = 11% / [1 – ($3.50/$17.00)] = 13.85%