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%.

karoliukas

If the return on equity for a firm is 15% and the retention rate is 40%, the firm’s sustainable growth rate is closest to:

A) 15%.

B) 9%.

C) 6%.

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g = (RR)(ROE)
= (0.15)(0.40)
= 0.06 or 6%

karoliukas

REM Corp.’s return on equity (ROE) is 19.5% and its dividend payout rate is 45%. What is the company’s implied dividend growth rate?

A) 10.73%.

B) 19.5%.

C) 8.78%.

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g = (ROE)(RR)
g = (19.5)(1 − 0.45)
g = (0.195)(0.55)
= 0.1073 or 10.73%

karoliukas

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%.

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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%