Question

An investor gathers the data for Disney Inc., (DIS) presented in the following table:

Net Income	$5,235
Shareholder's Equity	$51,300
Earnings per share	$4.37
Dividend per share	$3.11
Beta	1.25

Assuming that the market return is 7% and the risk free rate is 3%, Disney's ROE is closest to:

a. 8.2%

b. 16.3$

c. 14.2%

d. 10.2%

Assuming that the market return is 7% and the risk free rate is 3%, what is Disney's Retention Rate?

a. 42.63%

b. 19.21

c. 12.17%

d. 28.83%

Assuming that the market return is 7% and the risk free rate is 3%, Disney's sustainable growth rate is closest to?

a. 7.11%

b. 2.94%

c. 4.23%

d. 11.25%

Assuming that the market return is 7% and the risk free rate is 3%, what is Disney's required rate of return?

a. 3%

b. 8%

c. 7%

d.12%

Assuming that the market return is 7% and the risk free rate is 3%, what is the value of Disney Inc. share using the perpetual growth model?

a. $225.34

b. $63.30

c. $25.42

d. $149.16

Answer 1

Solution : -

(a)

Return on Equity (r) = Net income / Share holders Fund = $5,235 / $51,300 = 0.102 = 10.2%

Therefore Correct Answer is (D)

(b)

Retention Ratio (b) = ( EPS - DPS ) / EPS = ( $4.37 - $3.11 ) / $4.37 = $1.26 / $4.37 = 0.2883 = 28.83%

Therefore Correct Answer is (D)

(c)

Sustainable Growth rate (g) = ( Retention Ratio * ROE ) = ( 10.2% * 28.83% ) = 2.94%

Therefore Correct Answer is (B)

(d)

Required Return ( ke) = Rf + Beta * ( Rm - Rf ) = 3% + 1.25 * ( 7% - 3% ) = 3% + 5% = 8%

Therefore Correct Answer is (B)

(e) Value of Share = DPS * ( 1 + g ) / ( Ke - g ) = $3.11 * ( 1 + 0.0294 ) / ( 0.08 - 0.0294 )  

= $63.30

Therefore Correct Answer is (B)

If there is any doubt please ask in comments

Thank you please rate