Determine growth rate, Cost Accounting

(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%

Posted Date: 3/22/2013 5:13:15 AM | Location : United States







Related Discussions:- Determine growth rate, Assignment Help, Ask Question on Determine growth rate, Get Answer, Expert's Help, Determine growth rate Discussions

Write discussion on Determine growth rate
Your posts are moderated
Related Questions
A product is manufactured by passing through three processes: A, B and C. In process C a by-product is also produced which is then transferred to process D where it is completed. F

1. The bank added another company's deposit to our account. This would be included on the bank reconciliation as a(n). a) addition to the balance per books. b) subtraction from the

L I M I T A T I O NS OF STANDARD COSTING 1.     It may be very difficult to fix standards for all operations. 2.     Incorrect standards may result in wastage of mo

some clarificationon how to compute closing stock and openning stock using marginal costing technique and absorption.

annual usage rs 160000@ 40 per unit, cost of placing and receiving one order rs 200:annual carrying cost ; 25% of inventory value

Win Corporation sells a single product. Budgeted sales for the year are anticipated to be 609,725 units, estimated beginning inventory is 107,791 units, and desired ending inventor

1.  Prepare a cash flow forecast for the proposal to launch SafeCus in 2010 for a three-year period from 1 January 2010 using the data in the body of the Case Study and discount at

Time Keeping - Cost Accumulation A labour cost control routine should ensure that payments are paid only to employees who have spent time at the work place and that payments a

Vince's Pizza delivers pizzas to dormitories and apartments near a major state university. The company's annual fixed costs are $48,000. The sales price averages $9, and it costs t

Vintage Auto Company manufactures parts to order for antique cars. Vintage Auto makes everything from fenders to engine blocks. Each customer order is treated as a job. Vintage Aut