Chapter 3

Question 1

What is the formula for rate of return when you are given dividend in year one, price in year one and present value.

Answer 1

r=(D1 + P1 - P0)/P0

Question 2

What is the formula for present value when you are given growth rate, rate of return and current dividend

Answer 2

P0 = [D0(1+g)]/r-g

Question 3

What is the present value when you are given Earnings per share and rate of return

Answer 3

P0 = EPS/r-g

Question 4

What is the formula for dividend yield

Answer 4

D0/P0

Question 5

Formula for retained earnings

Answer 5

total earnings - dividends

Question 6

what is the payout ratio

Answer 6

D/EPS

Question 7

EPS

Answer 7

Total earnings/profits after depreciation, interest, and tax

Question 8

Formula for Plow back ratio

Answer 8

b = retained earnings / total earnings
or b=1-payout ratio (p)
or b = g/ROE

Question 9

formula for growth rate

Answer 9

return on equity x plow back ratio(b)

Question 10

For a no growth policy what formula should you use to find P0

Answer 10

EPS/ ROE. This is because the company doesnt plow back any of its earnings as it doesn’t invest in any new equity.