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

Marginal costing.., importance of marginal costing &standing costing

importance of marginal costing &standing costing

Economic order quantity, KIW Ltd currently orders Material B in batches of ...

KIW Ltd currently orders Material B in batches of 2,500 kgs. Material B is consumed at a steady, known rate over the company's planning horizon of one year. The current usage is 40

MARGINAL COST APPLICATIONS, HOW APPLICABLE IS THE MARGINAL COSTING CONCEPT ...

HOW APPLICABLE IS THE MARGINAL COSTING CONCEPT IN ACCOUNTING

Describe the costing system, Go the Hershey website to learn how to make He...

Go the Hershey website to learn how to make Hershey chocolate. (There is also a "print friendly" version of the chocolate making process at the end of the video.) Review the proces

Determine taxable profit, While on a business trip to Texas, David attended...

While on a business trip to Texas, David attended a mortgage foreclosure auction. At the auction (held on February 4, 1999), he acquired an abandoned sugarcane farm near Pearland.

Assumptions of cvp, Assumptions of CVP This chapter has given informati...

Assumptions of CVP This chapter has given information on how to apply CVP for the business analysis. Most of this analysis is keyed to the model of how profitability is impacte

First in first out or fifo, First in First Out or FIFO FIFO method is ...

First in First Out or FIFO FIFO method is based upon the assumption such stock purchased first is issued first. Prices of stock purchased first are employed to determine the v

Explanation of total cost line, Total costs include both variable costs and...

Total costs include both variable costs and fixed costs. Variable costs are costs which can beeasily identified or related to a cost per unit or activity level of some kind for exa

Changes in recreational use value - water quality, You perform a travel cos...

You perform a travel cost study that looks at the relationship between the cost of visiting a lake (including costs of travel, value of time spent not working & any entry fees), it

Calculate the weighted average cost of capital, A company is investigating ...

A company is investigating the effect on its cost of capital with respect to the tax rate. Suppose there is a capital structure of 20% debt, 10% preferred stock, and 70% common sto

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