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.
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Generally Accepted Accounting Principles,INVESTed CAPITAL