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The appropriate method to derive the growth rate according to Dividend-Growth Model for equity valuation is:
- a)Growth rate of sales over a period of time
- b)Plough-back ratio multiplied by return-on-equity
- c)Plough-back ratio multiplied by net profit margin
- d)Growth rate of fixed assets over a period of time
Correct answer is option 'B'. Can you explain this answer?
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The appropriate method to derive the growth rate according to Dividend...
The Gordon Growth Model (GGM) is used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate. It is a popular and straightforward variant of a dividend discount mode (DDM). According to this model, the appropriate method to derive the growth rate is plough-back ratio multiplied by return-on-equity. The plough-back ratio is a fundamental analysis ratio that measures how much earnings are retained after dividends are paid out.
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The appropriate method to derive the growth rate according to Dividend...
Explanation:
Plough-back Ratio:
- Plough-back ratio is the proportion of earnings retained by the company for reinvestment purposes.
- It is calculated as 1 - Dividend Payout Ratio.
Return-on-Equity (ROE):
- Return-on-Equity is a measure of how effectively a company is using its shareholders' equity to generate profit.
- It is calculated as Net Income divided by Shareholders' Equity.
Deriving Growth Rate:
- The growth rate according to the Dividend-Growth Model is calculated as Plough-back Ratio multiplied by Return-on-Equity.
- This formula reflects the portion of earnings retained for growth (Plough-back Ratio) and the effectiveness of using these retained earnings to generate profit (Return-on-Equity).
Importance of Growth Rate Calculation:
- The growth rate is an essential component in the Dividend-Growth Model for equity valuation.
- It helps in estimating the future dividends and ultimately the intrinsic value of the stock.
In conclusion, the appropriate method to derive the growth rate according to the Dividend-Growth Model for equity valuation is by multiplying the Plough-back Ratio by Return-on-Equity. This calculation provides insights into how effectively the company is reinvesting earnings to drive future growth and value for shareholders.
Plough-back Ratio:
- Plough-back ratio is the proportion of earnings retained by the company for reinvestment purposes.
- It is calculated as 1 - Dividend Payout Ratio.
Return-on-Equity (ROE):
- Return-on-Equity is a measure of how effectively a company is using its shareholders' equity to generate profit.
- It is calculated as Net Income divided by Shareholders' Equity.
Deriving Growth Rate:
- The growth rate according to the Dividend-Growth Model is calculated as Plough-back Ratio multiplied by Return-on-Equity.
- This formula reflects the portion of earnings retained for growth (Plough-back Ratio) and the effectiveness of using these retained earnings to generate profit (Return-on-Equity).
Importance of Growth Rate Calculation:
- The growth rate is an essential component in the Dividend-Growth Model for equity valuation.
- It helps in estimating the future dividends and ultimately the intrinsic value of the stock.
In conclusion, the appropriate method to derive the growth rate according to the Dividend-Growth Model for equity valuation is by multiplying the Plough-back Ratio by Return-on-Equity. This calculation provides insights into how effectively the company is reinvesting earnings to drive future growth and value for shareholders.
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The appropriate method to derive the growth rate according to Dividend-Growth Model for equity valuation is:a)Growth rate of sales over a period of timeb)Plough-back ratio multiplied by return-on-equityc)Plough-back ratio multiplied by net profit margind)Growth rate of fixed assets over a period of timeCorrect answer is option 'B'. Can you explain this answer?
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