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

Concepts of balanced scorecard and performance measurement, A college curre...

A college currently measures its performance by comparing the actual costs against its budgeted costs for the year.Now that the college is facing increased competition from Various

Uniform costing, Uniform Costing It is a general system utilizing agre...

Uniform Costing It is a general system utilizing agreed concepts, standard and principles accounting practices adopted via different entities in the similar industry to ensure

Distribution and selling cost budget, Distribution and Selling Cost Budget ...

Distribution and Selling Cost Budget This is the forecast of all costs incurred in distributing and selling the company's product throughout the budget period. This is closel

Capital, Capital We have seen previous in this section that the fundame...

Capital We have seen previous in this section that the fundamental accounting equality states as: Assets = liabilities + owners equity. From the illustration of balanc

Show the profit volume charts, Q. Show the Profit volume charts? A vari...

Q. Show the Profit volume charts? A variation of a break-even chart, representing graphically the relationship between profit &losses at different levels of sales volume achiev

DIVIDEND POLICY, EARNINGS AFTER TAX-1500000 NUMBER OF EQUITY SHARE OUTSTAND...

EARNINGS AFTER TAX-1500000 NUMBER OF EQUITY SHARE OUTSTANDING-300000 DIVIDEND PAID 600000 PRICE-EARNING RATIO-101 RATE OF RETURN ON INVESTMENT-20% WHAT IS OPTIMUM DIVIDEND PAY OUT

Alternative to total overhead variances, Alternative to Total Overhead Vari...

Alternative to Total Overhead Variances There is an easier approach to overhead variances.  In this approach, the overheads are NOT sub-divided into their fixed and variable e

What is a statement of cash flows, 1.What is a Statement of Cash Flows? How...

1.What is a Statement of Cash Flows? How does it differ from an Income Statement? 2.What unique information does the Statement of Cash Flows deliver to investors? Why do they care?

Determine the net book value, NSC Ltd. has a 31 May fiscal year-end. NSC di...

NSC Ltd. has a 31 May fiscal year-end. NSC disposed of its Information Systems Group (ISG) on 31 January 20X3. ISG had a net loss (after taxes) of $37,700,000 in 20X3, to the date

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