Microscam International ROE Calculation

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Question

A financial analyst with Mally, Feasance & Company is examining shares of Microscam International. Assume the following information:

Retention Rate: 72%

EPS: $2.16 -

Growth Rate: 21%

Discount Rate: 14.50%

Tax Rate: 35%

Using this information, what is the ROE for Microscam International?

Answers

A. 5.88%

B. 15.12%

C. 56.88%

D. 33.40%

E. The answer cannot be calculated from the information provided.

F. 29.17% F

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Explanations

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A. B. C. D. E. F.

Explanation

To determine the ROE for Intelligent, the equation used to determine the dividend growth rate must be manipulated. The dividend growth rate equation to be used is originally structured as follows: {g = ROE(1 - Dividend Payout Ratio)}.

The original equation must be rearranged using algebra, and will yield the following: {ROE = g / Retention Rate of Dividends}. Imputing the given information into this equation will yield the following:

{ROE = 0.21 / 0.72}.

Solving for ROE will yield a figure of 29.17%.

As you can see, neither the discount rate nor the tax rate is incorporated into the equation. Additionally, remember that (1 - Dividend Payout Ratio) is the same thing as the Retention Rate of Dividends.

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