The leverage ratio
Suppose you are an analyst in pharmaceutical industry for Bank of America. You collect the following data to estimate the expected growth rate of dividends and use it as an input for valuing an oil company’s common stock.
Return on Assets 10%
Profit Margin 8%
Debt/Equity 4.5
Payout Ratio 40%
a. The leverage ratio of this company is (sample answer: 3.50)
b. The company’s expected growth rate is (sample answer: 25.60%)
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