Lauren Turk is reviewing Francesca Toy's financial statements in order to estimate its sustainable growth rate. Using the information presented in Exhibit 14.25:
a. (1) identify and calculate the three components of the DuPont formula.
(2) calculate the ROE for 2011, using the three components of the DuPont formula.
(3) calculate the sustainable-growth rate for 2011.
b. Turk has calculated actual and sustainable growth for each of the past four years and finds in each year that its calculated sustainable-growth rate substantially exceeds its actual growth rate. Cite two courses of action (other than ignoring the problem) that Turk should encourage Francesca Toy to take, assuming the calculated sustainable- growth rate continues to exceed the actual growth rate.
Text Book: Investment Analysis and Portfolio Management By Frank Reilly, Keith Brown.