Determine growth rate, Cost Accounting

Assignment Help:

(a)  The value of a share of Rio National Equity on 31 December 2002, using the Gordon growth model and the capital asset pricing model, can be determined as follows.

Required rate of return using CAPM,

k = rf + β (kM - rf) = 4% + 1.8*(9% - 4%) = 13%

The value of share using Gordon growth model,

 P0 = D0*(1 + g)/(k -g) = $0.20*(1 + 12%)/(13% - 12%) = $22.40

Thus the value of a share of Rio National equity has been determined to be $22.40.

(b)  The three components of Rio National's return on equity (ROE) for the year 2002 using the DuPont model are as calculated as follows

145_ROE.png

Net profit margin = Net income/ sales = $30.16/$300.80 = 10.03%

Total Assets Turnover = Sales/Total assets = $300.80/$541.40 = 0.556

Equity multiplier = Total assets/Stockholder's equity = $541.40/$270.35 = 2

Thus the three components of Rio National's ROE have been calculated as 10.03%, 0.556 and 2.

(c)   The sustainable growth rate of Rio National on 31 December 2002 can be determined as follows

Growth rate, g = Earnings retention rate*ROE (or) (1 - Dividend payout ratio)*ROE

Dividend payout ratio = Dividends paid/Net income = $3.20/$30.16 = 10.61%

ROE = Net income/Stockholder's equity = $30.16/$270.35 = 11.16%

g = (1 - 10.61%)*11.16% = 9.97%

Thus sustainable growth rate has been calculated to be 9.97%


Related Discussions:- Determine growth rate

Prepare the appropriate entries for january 1, A corporation acquired a tru...

A corporation acquired a truck on July 1, 2012, at a cost of $162,000. The truck has a six-year useful life and an estimated salvage value of $18,000. The straight-line method of d

Calculate cost for each unit, Dropping a segment - George's Grill analyzes ...

Dropping a segment - George's Grill analyzes profitability of three operating units: restaurant, bar, and billiards room. Revenues, variable costs, and attributable fixed costs (wh

Cash Budgeting, Stopover industries ltd, a recently incorporated company pl...

Stopover industries ltd, a recently incorporated company plans to go into production next year. the following standard cost matrix has been assembled for one of the products it pro

Budgets, how can a poorly controlled budget cause problesm for a business?

how can a poorly controlled budget cause problesm for a business?

Job order costing, Amazing acrobatics performs acrobatics in stadiums aroun...

Amazing acrobatics performs acrobatics in stadiums around the world. The average show sells about 1,000 tickets at $60 per ticket. Each show requires a team of 45 highly trained sp

Equity or debt securities investments, a.         What are the major equity...

a.         What are the major equity and/or debt securities investments? What amounts are reported in the balance sheet? How significant are those amounts to the company's overall

Analysis of prime cost and overhead variances, You are required to conduct ...

You are required to conduct a detailed analysis of all the prime cost and overhead variances. You must create a fictitious company (and a fictitious cost object) which has at least

Traditional Costing System and Job Order Costing System, Hello, I''m curren...

Hello, I''m currently doing a research on a company and planning an Activity Based Costing system since the company is using Traditional Costing system to allocate the overhead to

Great pumpkin farms, Great Pumpkin Farms just given a dividend of $3.50 on ...

Great Pumpkin Farms just given a dividend of $3.50 on its stock.  The growth rate in dividends is expected to be a constant 5 percent per year indefinitely.  Investors need a 16 pe

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd