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

Cvp analysis, the formula of culculating product cost per unit

the formula of culculating product cost per unit

Show the objective of accounting standards, A sound foundation is necessary...

A sound foundation is necessary for success in any task from building a house to putting on make up. In terms of U.S Accounting standards it is necessary to have a sound foundatio

Explain stock valuation, G. Mills was appointed a local agent for the High ...

G. Mills was appointed a local agent for the High Power Mobile Workshop Bolt (HPMW-B) on 1 April 2009. The HPMW-B is manufactured by Mobile Equipment Ltd (MEL). The company charges

Direct and indirect costs, Direct and Indirect costs Recall such direc...

Direct and Indirect costs Recall such direct costs are costs which can be traced particularly to the end product of the production procedure while indirect costs cannot be so

Inventory valuation, How the FIFO, LIFO and AW problems can be solved?

How the FIFO, LIFO and AW problems can be solved?

Variance analysis, Variance Analysis This section describes how labour...

Variance Analysis This section describes how labour, material and overhead variances are calculated and what causes every of those variances. A chart is given also to describe

Working capital, What are the factors affecting working capital requiremen...

What are the factors affecting working capital requirements

Process losses, Process Losses Most manufacturing processes result in ...

Process Losses Most manufacturing processes result in several portion of the raw materials utilized not being transformed into a reliable half losses.  These losses may take t

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