honeycfa

In its latest annual report, a company reported the following:

Net income	= $1,000,000
Total equity	= $5,000,000
Total assets	= $10,000,000
Dividend payout ratio	= 40%

Based on the sustainable growth model, the most likely forecast of the company’s future earnings growth rate is:

A) 6%.

B) 12%.

C) 8%.

---

g = (RR)(ROE)

RR = 1 ? dividend payout ratio = 1 ? 0.4 = 0.6

ROE = NI / Total Equity = 1,000,000 / 5,000,000 = 1 / 5 = 0.2
Note: This is the "simple" calculation of ROE. Since we are only given these inputs, these are what you should use. Also, if given beginning and ending equity balances, use the average in the denominator.

g = (0.6)(0.2) = 0.12 or 12%

[此贴子已经被作者于2010-4-22 22:42:51编辑过]

honeycfa

Assuming past investments are stable and earnings are calculated to allow for maintenance of past earnings power, the firm’s expected dividend growth rate can be estimated by its:

A) sustainable growth rate.

B) price to earnings ratio.

C) risk premium.

---

Assuming past investments are stable and earnings are calculated to allow for maintenance of past earnings power, then the firm’s expected dividend growth rate (g) can be defined as the firm’s earnings plowback or retention rate (RR) times the return on the equity (ROE) portion of new investment. RR is equal to 1 minus the dividend payout ratio, and ROE equals profit margin times total asset turnover times financial leverage. This growth rate is also called the sustainable growth rate.