Reading 41: Discounted Dividend Valuation- LOS o(part1)～

interpret, company, current, return, equity

LOS o, (Part 1): Define, calculate, and interpret the sustainable growth rate of a company and explain the calculation’s underlying assumptions.

Q1. Supergro has current dividends of $1, current earnings of $3, and a return on equity of 16%, what is its sustainable growth rate?

A) 10.7%.

B) 12.2%.

C) 8.9%.

Q2. Dynamite, Inc., has current earnings of $26, current dividend of $2, and a returned on equity of 18%. What is its sustainable growth?

A) 14.99%.

B) 16.62%.

C) 13.37%.

Q3. In computing the sustainable growth rate of a firm, the earnings retention rate is equal to:

A) 1 ? (dividends / earnings).

B) Dividends / required rate of return.

C) 1 ? (dividends / assets).

Q4. The sustainable growth rate, g, equals:

A) pretax margin divided by working capital.

B) earnings retention rate times the return on equity.

C) dividend payout rate times the return on assets.

Q5. Sustainable growth is the rate that earnings can grow:

A) without additional purchase of equipment.

B) indefinitely without altering the firm's capital structure.

C) with the current assets.

Q6. GreenGrow, Inc., has current dividends of $2.00, current earnings of $4.00 and a return on equity of 16%. What is GreenGrow’s sustainable growth rate?

A) 9%.

B) 8%.

C) 6%.

Q7. Heather Callaway, CFA, is concerned about the accuracy of her valuation of Crimson Gate, a fast-growing telecommunications-equipment company that her firm rates as a top buy. Crimson currently trades at $134 per share, and Callaway has put together the following information about the stock:

Most recent dividend per share	$0.55
Growth rate, next 2 years	30%
Growth rate, after 2 years	12%
Trailing P/E	25.6
Financial leverage	3.4
Sales	$11.98 per share
Asset turnover	11.2
Estimated market rate of return	13.2%

Callaway’s employer, Bates Investments, likes to use a company’s sustainable growth rate as a key input to obtaining the required rate of return for the company’s stock.

Crimson’s sustainable growth rate is closest to:

A) 14.8%.

B) 13.2%.

C) 16.6%.