Question

19. Wilkinson and Daughters has net income of $415,400, total assets of $2.2 million, and total liabilities of $1.08 million. The company paid $270,000 in dividends. What is the firm's sustainable rate of growth? A. 9.69 percent
B. 11.06 percent

C. 12.98 percent D. 13.93 percent E. 14.15 percent

20. The common stock of A.G. Tailor has a required return of 16 percent. The latest press release stated that last year's dividend was $0.90 per share and that future dividends will increase by 15 percent for the following 3 years. After that, the dividend growth rate will be 3 percent indefinitely. What is one share of this stock worth to you today?

A. $8.42 B. $9.60 C. $10.26 D. $10.75 E. $12.03

Answer 1

19.

Total assets=Total liabilities+Total equity

Total equity=(2,200,000-1,080,000)=$1,120,000

ROE=Net income/equity

=(415400/1,120,000)

=0.370892857(Approx)

Dividend payout ratio=Dividend/Net income

=(270,000/415400)

=0.649975926

Retention ratio=1-Dividend payout ratio

=1-0.649975926

=0.350024074

Sustainable growth rate=(ROE*Retention ratio)

=(0.370892857*0.350024074)

=12.98%(Approx).

20.

D1=(0.9*1.15)=1.035

D2=(1.035*1.15)=1.19025

D3=(1.19025*1.15)=$1.3687875

Value after year 3=(D3*Growth Rate)/(Required return-Growth rate)

=(1.3687875*1.03)/(0.16-0.03)

=$10.84500865

Hence current price=Future dividends*Present value of discounting factor(rate%,time period)

=1.035/1.16+1.19025/1.16^2+$1.3687875/1.16^3+$10.84500865/1.16^3

which is equal to

=$9.60(Approx).