Interactive thread on investment-related questions

[Southie]

Re: Interactive thread on investment-related questions

@Ali

a bit advanced question

An analyst gathers the following information about two companies for the year ending 31
December 2008:
---------------------Company 1 ----------- Company 2
Dividend payout ratio ---- 37.5% --------------- 40.0%
Return on assets--------- 12% ---------------- 10.0%
Financial leverage -------- 1.6------------------ 2.0

Which of the following best describes the expected growth rate of Company 1? The
expected growth rate of Company 1 compared to Company 2 is:

A. lower.
B. greater.
C. the same.

P.S. if you want to keep it to basics ignore this one for a while

Since leverage ratio > 1, it cannot be debt to capital. So I will assume it is debt to equity.

A
div 37.5
Inc 100
Roa 2%
Assets 833
D/ Ee 1.6
Assets = d + eq
Sq = 833/2.6= 320
Debt = 513

B
Div 40
Ear 100
assets 1000
eq 333
Debt 666

Company a generatesincome off lower asset base and its return on equity also slightly higher. So based On ROA and Return on eq! A grows faster than B if it can maintain these ratios.