karoliukas

When a company’s return on equity (ROE) is 12% and the dividend payout ratio is 60%, what is the implied sustainable growth rate of earnings and dividends?

A) 4.0%.

B) 7.8%.

C) 4.8%.

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g = ROE × retention ratio = ROE × (1 – payout ratio) = 12 (0.4) = 4.8%

karoliukas

A company’s payout ratio is 0.45 and its expected return on equity (ROE) is 23%. What is the company’s implied growth rate in dividends?

A) 12.65%.

B) 10.35%.

C) 4.16%.

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Growth Rate = (ROE)(1 – Payout Ratio) = (0.23)(0.55) = 12.65%

karoliukas

A company’s required return on equity is 15% and its dividend payout ratio is 55%. If its return on equity (ROE) is 17% and its beta is 1.40, then its sustainable growth rate is closest to:

A) 6.75%.

B) 7.65%.

C) 9.35%.

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Growth rate = (ROE)(Retention Ratio)
= (0.17)(0.45)
= 0.0765 or 7.65%

karoliukas

If a firm’s growth rate is 12% and its dividend payout ratio is 30%, its current return on equity (ROE) is closest to:

A) 40.00%.

B) 17.14%.

C) 36.00%.

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g = (RR)(ROE)
g / RR = ROE
0.12 / (1 - 0.30) = 0.12 / 0.70 = 0.1714 or 17.14%

karoliukas

A company with a return on equity (ROE) of 27%, required return on equity (ke) of 20%, and a dividend payout ratio of 40% has an implied sustainable growth rate closest to:

A) 12.00%.

B) 10.80%.

C) 16.20%.

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g = (RR)(ROE)
= (.60)(.27)
= 0.162 or 16.2%

karoliukas

A firm has a return on equity (ROE) of 15% and a dividend payout rate of 80%. If last year's dividend was $0.80 and the required return on equity is 10%, what is the firm's estimated dividend growth rate and what is the current stock price?

[td=1,1,130]Dividend growth rate

Stock price

A) 12.00%   $11.77

B) 3.00%   $9.96

C) 3.00%   $11.77

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The expected growth rate of dividends is the retention rate (RR) times the return on the equity portion of new investments (ROE), g = (RR)(ROE). The retention rate is 1 minus the payout rate. RR = (1 - 0.80) = 0.20. g = (0.20)(0.15)= 3.00%.
The value of the stock will be the dividend paid next year divided by the required rate of return minus the growth rate.  Next year's dividend is $0.80 × 1.03 = $0.824.  So the value is 0.824 / (.10 - 0.03) = 0.824 / 0.07 =  $11.77

karoliukas

The Sustainable Growth Rate is equal to:

A) (ROE) x (1+RR).

B) (ROE) x (RR).

C) (ROE) x (1-RR).

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The Sustainable Growth Rate is equal to the return on the equity portion of new investments (ROE) multiplied by the firm's retention rate (RR).

karoliukas

A high growth rate would be consistent with:

A) a high dividend payout rate.

B) a low retention rate.

C) a high ROE.

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Since g = retention rate * ROE, or (1 - payout ratio) * ROE, the only choice that would result in a higher g is a higher ROE. A low ROE, or a high dividend payout rate (which is the same as a low retention rate) would result in a low growth rate.

karoliukas

A firm has a profit margin of 10%, an asset turnover of 1.2, an equity multiplier of 1.3, and an earnings retention ratio of 0.5. What is the firm's internal growth rate?

A) 6.7%.

B) 7.8%.

C) 4.5%.

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ROE = (Net Income / Sales)(Sales / Total Assets)(Total Assets / Total Equity)
ROE = (0.1)(1.2)(1.3) = 0.156
g = (retention ratio)(ROE) = 0.5(0.156) = 0.078 or 7.8%

karoliukas

Given the following information, compute the implied dividend growth rate.

• Profit margin = 10.0%
• Total asset turnover = 2.0 times
• Financial leverage = 1.5 times
• Dividend payout ratio = 40.0%

A) 18.0%.

B) 4.5%.

C) 12.0%.

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Retention ratio equals 1 – 0.40, or 0.60.
Return on equity equals (10.0%)(2.0)(1.5) = 30.0%.
Dividend growth rate equals (0.60)(30.0%) = 18.0%.