Lecture5(Recorded).pptx - Exc 6 Question 1 u2022 DBK Bank...

Exc 6

Question 1
•
DBK Bank paid out $ 80 million in dividends on net income of $100
million in the most recent year. The book value of equity for the firm is
$800 million. Assuming that the bank maintains its current payout
ratio and return on equity in perpetuity, what is the expected growth
in earnings per share in perpetuity?
• 8%
•
2%
•
5%
•
2.5%
•
None of the above

Solution
•
d. 2.5%. The payout ratio is 80% (80/100) and the return on equity is
12.5% (100/800). The expected growth rate in earnings per share = (1-
Payout ratio) (Return on equity) = (1-.8) (.125) = 2.5%.

Question 2
• Viaconda Inc. is a tourism company that reported $10 million in net income on a
book value of equity of $110 million in the most recent year; the company generated
$ 1 million in after-tax interest income on a cash balance of $20 million. The
company also reported net capital expenditures of $4 million, an increase in working
capital of $ 2 million and an increase in total debt of $3 million during the year.