Reading 42: Discounted Dividend Valuation-LOS n 习题精选 growth, center, company, interpret, 2011

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Session 11: Equity Valuation: Industry and Company Analysis in a Global Context
Reading 42: Discounted Dividend Valuation

LOS n: Calculate and interpret the sustainable growth rate of a company, and demonstrate the use of DuPont analysis to estimate a company's sustainable growth rate.

 

 

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

A) 12.2%.

B) 8.9%.

C) 10.7%.

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g = (1 – 1/3)(0.16) = 0.107

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In the five-part DuPont model ROE = (NI/EBT)(EBT/EBIT)(EBIT/sales)(sales/assets)(assets/equity), the product of the first three terms is:

A) net profit margin.

B) gross profit margin.

C) operating profit margin.

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(NI/EBT)(EBT/EBIT)(EBIT/sales) = (NI/sales) = net profit margin.

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Which of the following is NOT a component of the sustainable growth rate formula using the DuPont model?

A) Net income/sales.

B) EBIT/interest expense.

C) Earnings retention ratio.

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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)

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Demonstrate the use of the DuPont analysis of return on equity in conjunction with the sustainable growth rate expression.

The following statistics are selected from Kyle Star Partners (Kyle) financial statements:

Sales	$100 million
Net Income	$15 million
Dividends	$5 million
Total Assets	$150 million
Total Equity	$50 million

What is Kyle’s sustainable growth rate?

A) 20.0%.

B) 24.5%.

C) 33.3%.

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SGR	= ROE × [(net income ? dividends) / net income]
	= (15 million / 50 million) × (15 million ? 5 million) / 15 million
	= 20.0%

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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) 20%.

C) 15%.

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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%

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Sustainable growth is the rate that earnings can grow:

A) without additional purchase of equipment.

B) with the current assets.

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

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Sustainable growth is the rate of earnings growth that can be maintained indefinitely without the addition of new equity capital.

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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) 8%.

B) 9%.

C) 6%.

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GreenGrow’s sustainable growth rate is 8%.

g = [1 – ($2/$4)](0.16) = 8%

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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) $2.50.

C) $1.75.

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

A) 16.62%.

B) 14.99%.

C) 13.37%.

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g = [1 ? ($2 / $26)]0.18 = 16.62%